Question

In 1950, the average price of a new car was $1,510. In 2020, the average new car price was $37,851. In 1950, the average income was $2,570 and the average income grew to $81,654 in 2020. Assuming the increase in the car price was the inflation rate, what was the annual inflation rate over this period? What was the real salary in 2020 in terms of 1950 dollars

Answer 1

Average Price of new car in 1950 = P0 = $1,510

Average Price of new car in 2020= P1 = $37,851

Let if = inflation rate

n = (2020 - 1950) = 70 years

P1 = P0 * (1+if)^n

$37,851 = $1,510 * (1+if)^70

(1+if)^70 = 25.0668874

(1+if) = 1.04709756

if = 0.04709756

if = 4.71%

Annual inflation rate over this period is 4.71%

Real salary in 2020 in terms of 1950 dollars = 2020 salary / (1+inflation rate)^n

= $81,654 / (1+4.71%)^70

= $81,654 / 25.070972

= $3,256.91402

THerefore, Real salary in 2020 in terma of 1950 dollars is $3,256.91