Question

In 1979 the median household in the U.S. earned $15,620 and by 2015 this was $76,800 (both of these values are nominal). As we're looking at the median household, these numbers are representative of the typical American household as median means middle -- that is, in 1979 half of all households earned more than $15,620 and half earned less (and the same holds for the 2015 value). These numbers include federal taxes as well as federal benefits. The CPI in 1979 was 72.6 and in 2015 it was 237. On average, how much did real median income grow per year over these years?

We'll be using this result in class.

Finally, for this and the following short-answer questions, please fully explain your answer and show all computations.

Answer 1

In 1979 the nominal median household in the U.S. earned = $15,620

In 2015 the nominal median household in the U.S. earned = $76,800

In 1979, the Consumer Price Index (CPI) was = 72.6

In 2015, the Consumer Price Index (CPI) was = 237

The real income is determined after deflating the money earned by the Cost of Living Index by using the formula =

(Money Earned/Cost of Living Index) * 100

The Real Income earned in 1979 = (15620/72.6) * 100 = 21,515.15

The Real Income earned in 2015 = (76800/237) * 100 = 32,405.06

Hence, over these years, on average the real median income grew per year by = Real Income earned in 2015 - Real Income earned in 1979

= 32,405.06 - 21,515.15  

= $ 10,889.91