Arguing with Data: Introduction to Descriptive Data Analysis

1. Arguing with Data: Introduction to Descriptive Data Analysis Professor Sarah Reber Lecture 4

2. Today • Inflation • What is inflation and how is it measured? • Why are there different measures of inflation? • How do I know which measure to use? • How do I adjust for inflation? • Other normalizations

3. Inflation • Average prices in the economy rise over time • Some go up, others down • Average change tends to be positive • Macro-economic implications • For efficiency and long-term growth • Economy “overheats”  inflation • We are not concerned with these things here • Easy(ier) to measure things in “current dollar” • But how to compare over time if prices are changing?

4. An Example • You have 2 kids • One went to college 10 years ago and had the following annual expenditures: • 10 books @ $100 per book • 1 1br apartment @ $2000 • 50 restaurant meals @ $5 per meal • 100 meals at home @ $3 per meal • Now your next kid is going to college and you want to give her the $$’s she needs to buy the same stuff, even though prices are higher

5. Example, cont • Need to give Kid 2 49% more to buy the same bundle of goods that Kid 1 bought • Index is normalized to 100 for 2003 • Inflation index is 149 in 2013 • Will Kid 2 buy the same bundle? • Substitute away from goods that got relatively more expensive = Substitution bias • What about online textbooks? • New good bias • Won’t need quite so much to get same utility • Index with fixed basket of goods will overstate changes in the “cost of utility”

6. Terminology • Denominated in the dollars of the time the thing was being measured • Nominal • Current Dollars • You do not give a year for the dollars • Inflation-adjusted • Constant dollars • “Real” X (e.g. “Real Education Spending”) • Inflation-adjusted • You must indicate what year’s dollars you are using

7. CPI-U • Consumer Price Index-All Urban Consumers • (Most) common measure • Many government programs tied to this • Tax brackets • S.S. • Poverty thressholds • Basket of goods reflects • Urban • Consumers • Basket of goods updated infrequently • Some to considerable substitution bias

8. It’s somebody’s job…

9. GDP Implicit Price Deflator • 100 × Nominal GDP ÷ Real GDP • Real GDP in a reference year’s dollars • Broader than CPI • Not just consumer • Domestic Product = Produced domestically • Oil prices show up less here than in CPI • Basket of goods updated continuously  Less substitution bias • GDP Deflator shows less inflation, especially since 1980 or so

14. Other Measures… • CPI-U Chained: Experimental measure with less substitution bias • Core CPI: Excluding food and energy • Don’t use this one, it is for the Fed to care about • Specific places • In theory, could use these to show how much more you need to buy the same bundle of goods in L.A. vs Philly (also over time) • Specific types of goods • medical services, education services • Substitution bias and adjusting for quality make this problematic • You will not usually use these

15. To better compare quantities

16. Summary • Most often, use the CPI-U • Not the best, but the most widely-used and understood • Esp if you are looking at consumers/housholds and what they can afford over time • GDP Deflator is broader • Some consider it a better measure • Esp if looking at government stuff • Understates the effect of changes in oil/energy prices (and other imports) on consumers

17. Finding the data • CPI • http://bls.gov/cpi/home.htm#data • GDP Deflator (US) • http://www.bea.gov/iTable/index_nipa.cfm

18. How to do it • Decide which measure you want to use • Find the data series for the inflation measure you want to use • Choose your base year and find the value of the index in that year • Divide every value of the index by the base year value • Multiply your data by the new index value for the relevant year

19. Going to the movies • In 1970, a movie ticket cost $1.55 • In 2012, a movie ticket cost $7.94 • Has the price of a movie ticket gone up in real terms?

20. Ranking Movies • http://boxofficemojo.com/alltime/adjusted.htm

21. Your turn • What is the 1960 minimum wage in today’s dollars (2013)? • What is the 2013 minimum wage in 1960 dollars? • In what year did the real minimum wage reach its maximum? • In what year did the real minimum wage reach its minimum?

22. Trends in the minimum wage

27. Exchange Rates • Market exchange rate: How many Euros can I buy with 1 dollar? • Use this to figure out how many dollars you need to buy some specific thing in another country • Purchasing Power Parity (PPP) Exchange Rate: How many dollars do I need to buy the same bundle of goodsor achieve the same standard of livingin another country • Use this when comparing living standards across places • Lots of measurement issues • World Bank has data on this

28. Other normalizations • Total Population (per-capita) • Population served/other sub-population • GDP • Relative to some other benchmark • Poverty cutoff • http://oregonstate.edu/instruct/anth484/minwage.html • Wages/income

29. Log Scale? • Some things will grow exponentially just because prices grow exponentially • Adjusting for inflation will make log scale unnecessary • Some things grow exponentially on top of inflation • May want to use log scale • Depends on time scale and what you are trying to emphasize • Longer time horizons  log scale often useful

30. The Dow Jones Industrial Avg • Tells us the total market value of the stocks that are part of the index • How has that changed over time?

35. Debt held by the public • Adjusted for inflation • Per capita • Share of GDP

40. Alternative Rankings of Movies • By # of tickets sold • By # of tickets sold / population • By $ per population • Relative to that year’s total gross

41. Normalize or Compare? • (Almost) always normalize (adjust) for inflation or exchange rates • Unless your point is about inflation • Is the return to the stock market more than inflation? • Can be OK (not great) if the point is to compare • Normalize if it makes sense to say X per Y • Spending per capita • Compare if you want to be able to see which series drives changes • But use the ratio or difference if that helps the reader see what you see • Use the ratio if it has a ready interpretation

42. Assignment for next week • Getting the GDP Price deflator data • Aggregation • Walk through the assignment for questions