Question

For the indicated years, the nominal price of a particular desk and the value of the Consumer Price Index (CPI) are provided below.

Year 1970      1980      1990     2000       2016

Nominal Price

of Desk             $260      $330      $455     $540       $680

CPI 38.8      82.4      130.7 172.2 241.7

a. Calculate the real price of the desk in the year 1970 in 1980 dollars.

b. Calculate the real price of the desk in the year 1990 in 1980 dollars.

c. Calculate the percentage change in the real price of the desk between 1970 and 1990.

Answer 1

Real Price of Desk_year = Nominal Price of Desk_year * 100 / CPI_year

a. Compute the real price of the desk in the year 1970 in 1980 dollars.

Real price of the desk in the year 1970 in 1980 dollars = Real Price of Desk_{1980 *} CPI₁₉₇₀ / CPI₁₉₈₀

                                                                                                         = $348.13 * 38.8 / 82.4 = $188.58

Real price of the desk in the year 1970 in 1980 dollars is $188.58

b. Compute the real price of the desk in the year 1990 in 1980 dollars.

Real price of the desk in the year 1990 in 1980 dollars = Real Price of Desk_{1980 *} CPI₁₉₉₀ / CPI₁₉₈₀

                                                                                                         = $348.13 * 130.7 / 82.4 = $635.24

Real price of the desk in the year 1990 in 1980 dollars is $635.24

c. Compute percentage change in the real price of the desk between 1970 and 1990

                        = . (Real Price of Desk₁₉₉₀ - Real Price of Desk₁₉₇₀) / Real Price of Desk₁₉₇₀

= ($348.13 - $670.10) / $670.10 = -0.4805

                        = -48.05%

Real price of desk in 1990 has gone down by 48.05% wrt 1970