ARE100A Homework #1 Problem 2: Nominal versus Real Gasoline Price (10 points) Ta
ID: 1142280 • Letter: A
Question
ARE100A Homework #1 Problem 2: Nominal versus Real Gasoline Price (10 points) Table 1.1 shows the average gasoline price and the CPI from 1990 to 2014 Table 1.1 Real v.s. Nominal Gasoline Price (U.S City Average, unleaded regular). (Note: Both CPI and gasoline prices are for the month of August.) (The data Data folder on SmartSite.) Data Source: U.S Bureau of Labor Statistics Gasoline Gasoline Gasoline Year CPI Nominal Price Real Price ($1990) Real Price ($2014) 1982-84-100Sigallon August Au 1990 1994 1998 131.6 149 163.4 80.7 1.42 985 8.31 237.85 10 745 3.481 a. Calculate the real price of gasoline in 1990 dollars. Show your calculation formula here, and fill out the table below. Has the real price increased or decreased from 1990 to 2014? (3 points) b. What is the percentage of change in the real price (in 1990 dollars) from 1990 to 2014? (2 points) c. Calculate the real price of gasoline in 2014 dollars. Show your calculation formula here, and fill out the table below. (3 points) d. What is the percentage change in the real price (in 2014 dollars) from 1990 to 2014? Compare this with your answer in part (b). What do you notice? Explain. 2 points) Page 3Explanation / Answer
(a) Real price in 1990 dollars, year N = Nominal price in year N x (CPI in year N / CPI in 1990)
(b) Percentage change = (6.29/1.19) - 1 = 5.2857 - 1 = 4.2857 = 428.57%
(c) Real price in 2014 dollars, year N = Nominal price in year N x (CPI in year N / CPI in 2014)
Computed as above.
(d) Percentage change = (3.48/0.66) - 1 = 5.2727 - 1 = 4.2727 = 427.27%
Percentage change in real price is lower when computed with 2014 dollars. The reason is CPI is higher in 2014 than in 1990.
Year CPI Nominal Price Real Price (1990 dollars) Real Price (2014 dollars) 1990 131.6 1.19 1.19 0.66 1994 149 1.182 1.34 0.74 1998 163.4 1.052 1.31 0.72 2002 180.7 1.423 1.95 1.08 2006 203.9 2.985 4.62 2.56 2010 218.31 2.745 4.55 2.52 2014 237.85 3.481 6.29 3.48