Postage Stamp 1973 1983 Today Nominal Price 8¢ 20¢ 47¢ Percent Increase in the price of...

Postage Stamp	1973	1983	Today
Nominal Price	8¢	20¢	47¢
Percent Increase in the price of stamps
CPI	30.61	100.00	244.048
Percent increase in the CPI (Inflation)
Real Price		20¢

Calculate the percent change in the price of stamps for 1983 and today.

Calculate the percent change in the price level for 1983 and today.

What do you think will happen to the real price of stamps between 1973 and 1983? Between 1983 and today? Notice that I am asking for a prediction before you make the computation.

Calculate the real price of stamps.

Are the changes in the real price consistent with your prediction?

What does it mean if the real price falls? Rises? Remains constant?

Solutions

Expert Solution

Here is the completed table:

	1973	1983	Today
Nominal Price	8	20	47
% change in nominal price	N/A	150	135
CPI	30.61	100	244.048
% change in CPI	N/A	226.6906	144.048
Real Price	26.13525	20	19.25851

The formula used to compute the percent change is as follows:

A) Using this, we arrive at 135% change in the price of stamps for 1983 and today.

B) To compute percent change in CPI, we use the same Formula and arrive at 144.048% increase in the price level today from 1983

C) Percent change in CPI between 1973 and 1983 is 226.69%, while the Percent change in Nominal Price is 150%

Since, Percent change in CPI > Percent change in Nominal Price, the real price should fall.

Real Price is computed using: (Nominal Price/ CPI of the current year )*100

Real Price for 1973 : 26.13

Real Price for 1983 : 20

D) From the table it is consistent with our prediction made in part C.

E) Let us understand it from the point of view of Real Income.

If real income is falling, it means that, you would be able to buy lesser amount of goods compared to initial level of the fall. This happens because the purchasing power of the money is falling. You are worse off

If real income is increasing, it means that, you would be able to buy more amount of goods compared to initial level of the increase. This happens because the purchasing power of the money is rising. You are better- off

If real income is constant, it means that, you would be able to buy same amount of goods compared to initial level of the goods as the purchasing power of the money is constant. You are neither better- off nor worse-off

Rahul Sunny answered 6 months ago

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