Question

Identify the purchasing power using the

concept of weighted aggregate price index

number.
​

Answer 1

Step-by-step explanation:

Calculating Purchasing Power

To calculate the purchasing power, collect the CPI information from the Bureau of Labor Statistics. In January 1975, the CPI was 38.8 and in January 2018, was 247.9. Divide the earlier year by the later year and multiply by 100 to derive the CPI change during that period: (38.8 / 247.9) x 100 = 15.7 percent.

Take this CPI derivation, and subtract it from 100 to get the percentage change: 100 - 15.7 = 84.3 percent. This means that the dollar has an 83 percent less purchasing power in 2018, compared to 1975.

Applying Purchasing Power

While the percentage is a good indication of how prices are going up, it doesn't give you a practical indication of how much it would cost to buy the same thing in 2018 compared to 1975. To do this, use a variation of the calculations above. Instead of dividing the earlier year by the later year, do the inverse and multiply it by a dollar value: (247.9 / 38.8) x $1 = 6.39. In this example, you need $6.39 in 2018 to buy what cost $1 in 1975.

Adjust the dollar value used to determine higher priced items. For example, if it cost $10,000 to buy a car in 1975, the equivalent purchase would be $63,900 in 2018. The Bureau of Labor Statistics can also provide industry-specific costs, since these numbers are for all industry averages.

Answer 2

The purchasing power using the concept of the weighted aggregate price index number is as follows -

• Purchasing power is defined as the value of a currency expressed in terms of the number of goods or services that 1 unit of money can buy. Purchasing power is very important because, all other things being equal, inflation reduces the number of goods or services one will be able to purchase.
• Weighted aggregative indexes are constructed for an aggregate of item prices that are weighted in some way (by corresponding amounts produced, consumed, or sold) to show their importance.
• The purchasing power of money and real wage is calculated by using the Consumer Price Index (CPI).

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