Question

CPI data from Econland uses 2012 as a base year, and are scaled so that the base year has a value of 100.

a) The nominal price of a textbook was $5 in 1970, and the CPI for 1970 = 14. What is the real price of the textbook in 1970, measured in 2012 dollars?

b) The CPI in 2020 is 260. What was the price of the textbook in 1970, converted to 2020 prices?

Answer 1

a)

Real Price = (Nominal Price / Price level)*100 where CPI = Price level

=> Real Price = (Nominal Price / CPI)*Base Price and here Base Price is 2012 price and equals 100

=> Real Price = (Nominal Price / CPI)*100

Here nominal price = 5, CPI in 1970 = 14

=> Real Price = (Nominal Price / CPI)*100 = (5/14)*100 = 35.71

Hence Real Price = 35.71

b)

Real Price = (Nominal Price / Price level)*100 where CPI = Price level

=> Real Price = (Nominal Price / CPI)*Base Price and here Base Price is 2020 price and equals 260

=> Real Price = (Nominal Price / CPI)*260

Here nominal price = 5, CPI in 1970 = 14

=> Real Price = (Nominal Price / CPI)*260 = (5/14)*260 = 92.86

Hence, the price of the textbook in 1970, converted to 2020 prices is 92.86