Question

The cost of the average consumer’s basket of goods in 2018 was nearly 10 times what it was in 1950. In other words, what the average consumer bought for $100 in 1950 would cost a consumer $1,000 in 2018. Does this mean that the purchasing power of the average consumer is one-tenth what it was in 1950? Explain your reasoning. The perception of an increase in the average cost of a basket of goods, from $100 to $1,000, reflects . To analyze the effect of inflation on purchasing power, we should focus on values. As prices have risen over time, so have incomes, and now, on average, purchasing power is than in

Answer 1

Answer:

The CPI might have increased by ten during the last 68 years, and apparently that is a huge increase. But we also remember that the salaries back then were not the same as today. The purchasing power measures is a relative measure between the nominal prices and the nominal salaries. For example, if back then a chewing gum was worth $0.10 and now it is worth $1, but your salary was $4 per hour, and now it is $50 per hour; your purchasing power actually increased. Before, you could purchase 40 pieces of chewing gum with one hour of labor, and now you can purchase 50 pieces. The same applies to other goods; you have to compare how many goods you could purchase back then and how many goods you can purchase now.