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Arguing with Data: Introduction to Descriptive Data Analysis

In this lecture on descriptive data analysis, Professor Sarah Reber explores the complex concept of inflation. She addresses what inflation is, how it is measured, and the various measures available, including the Consumer Price Index (CPI) and GDP deflator. Through practical examples, such as the rising costs of education, she illustrates how to adjust for inflation when comparing price levels over time. The implications of inflation for economic growth and efficiency are discussed, highlighting the importance of selecting appropriate measures for accurate analysis.

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Arguing with Data: Introduction to Descriptive Data Analysis

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  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

  10. 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

  11. To better compare quantities

  12. 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

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

  14. 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

  15. 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?

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

  17. 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?

  18. Trends in the minimum wage

  19. 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

  20. 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

  21. 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

  22. 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?

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

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

  25. 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

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

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