Real World Graduation: Question 7

RealWorldGraduation_Question_7   < PDF

A reputable economic research organization conducted a survey of prices in 2004. They found that median prices of the following items increased as follows:

  1. Unleaded gasoline, from $1.59 per gallon to $1.88 per gallon; an increase of 18.23% [1]
  2. Single-family homes, from $243,756 to $264,540; an increase of 8.52% [2]
  3. Soybeans, from $6.08 per bushel to $7.56 per bushel; an increase of 24.34% [3]
  4. Flour, 5-lb bag, from $1.55 to $1.65; an increase of 6.45% [4]

From these statistics, what is the approximate inflation rate from 2003 to 2004:

a) The inflation rate should include only the data for gasoline, soybeans, and flour, since those are common products that people use directly or indirectly every day; the inflation rate is approximately 16.3% = ((18.23 + 24.34 + 6.45)/3)

b) Only the data for single-family homes should be used, since homes are purchased on long-term mortgages (usually 30 years), and are therefore a better predictor of long-term inflation. The long-term inflation rate is the most important metric.  Therefore the inflation rate for 2003-2004 is approximately 8.5%.

c) Only the data for unleaded gasoline should be used because it is the only one of these that most people have to buy directly. Most people do not buy homes every year, and the prices of soybeans and flour are not useful because they are only components in items purchased by most people (i.e., flour is used in making bread, but there are other costs besides flour that contribute to the increase price of bread, such as sugar, butter, and fuel).  Therefore, the inflation rate for 2003 – 2004 is approximately 18.23%.

d) All of the data should be used, but not equally weighted, since some of these are purchased frequently, and some infrequently, and some are used more than others. For example, gasoline is purchased frequently, and homes infrequently.  No data was provided on the pro-rated amount of usage, so the most that can be inferred about inflation during this period is that was somewhere between 6.45% and 24.34%.

e) Only the data for soybeans and sugar should be used, since they are basic commodities that are used in a large number of products, and represent structural trends in the economy. Therefore, the inflation rate was approximately 15.39% (the average of 24.34 and 6.45)

[1]        Energy Information Administration

[2]        Federal Housing Finance Board; see Government info (The New York Times Company)

[3]        farmdoc Project, College of Agricultural, Consumer and Environmental Sciences, University of Illinois at Urbana-Champaign

[4]        Wisconsin Farm Bureau Federation

(See answer on p. 2 of the PDF.)


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