Question

16.13 Los Angeles and New York. The Bureau of Labor and Statistics publishes separate consumer price indexes for major metropolitan areas in addition to the national CPI. THe CPI (1982-84 = 100) in July 2015 was 247.1 in Los Angeles and 261.2 in New York.

(a) These numbers tell us that prices rose faster in New York than in Los Angeles between the base period and July 2015. Explain how we know this.

(b) These numbers do not tell us that prices in July 2015 were higher in New York than in Los Angeles. Explain why.

Answer 1

(a) These numbers tell us that prices rose faster in New York than in Los Angeles between the base period and July 2015. Explain how we know this.

The consumer price index (CPI) is base year (1982-84) was 100

And in July 2015, it was 247.1 in Los Angeles

Therefore, percentage growth from base year = (CPI in July 2015 – CPI in base year)/ CPI in base year

= (247.1 -100)/100 = 1.471 or 147.10%

And in July 2015, CPI was 261.2 in New York

Therefore, percentage growth from base year = (CPI in July 2015 – CPI in base year)/ CPI in base year

= (261.2 -100)/100 = 1.612 or 161.20%

Now looking at percentage growth, we can say that the prices rose faster in New York than in Los Angeles between the base period and July 2015.

(b) These numbers do not tell us that prices in July 2015 were higher in New York than in Los Angeles. Explain why.

Yes, these numbers do not tell us that prices in July 2015 were higher in New York than in Los Angeles because it is just a comparative analysis from base year (1982-84) to July 2015. Suppose the prices were too low in New York than in Los Angeles in base year than even higher percentage growth, the prices will not be higher in July 2015.

For example, assume that the prices in New York was $100 and $200 in Los Angeles

So the prices in New York in July 2015 = $100 * (1+161.20%) = $261.20

And the prices in Los Angeles in July 2015 = $200 * (1+147.10%) = $494.20

But if prices were high in base year in New York then it will also high in July 2015. Therefore these numbers do not tell us that prices in July 2015 were higher in New York than in Los Angeles.