Index Numbers: Gasoline and Inflation -- Why We Need the Consumer Price Index

Semra Kilic-Bahi, Colby-Sawyer College, New London NH
Created: 2006-07-27 12:32:26 Last Modified: October 30, 2007 13:35
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

In this Spreadsheets Across the Curriculum activity, which was written and first used in 2005, students explore the question "Are gasoline prices really higher now than they were in the past?" They build spreadsheets and construct XY graphs to examine the actual and relative cost of gasoline in the 27-year period, 1978-2005. They chart the price of gasoline and construct a gasoline index number to make comparisons. They compare the changing price of gasoline with the changing prices in general by means of the consumer price index. They find that the relative cost of gasoline was higher in 1980.

Learning Goals

Students will:
  • Build a spreadsheet to graph the price of gasoline year by year from 1978 through 2005.
  • Define a Gasoline Price Index using 1978 as the reference year and use the spreadsheet to calculate and plot the price of gasoline relative to the price in 1978.
  • Use the spreadsheet and the Consumer Price Index (CPI) to plot the changing prices in general over the same time period.
  • Compare the trajectory of the relative price of gasoline to the CPI.
  • Build a spreadsheet to adjust for the amount of inflation between 1978 and later years using the CPI.
  • Distinguish between the amount of inflation between one year and later years, and the rate of inflation from year to year.
  • Build a spreadsheet to chart the annual rate of inflation using the CPI.
In the process the students will:
  • See the value of using ratios and proportions to make comparisons and thus associate the concept of index numbers with its mathematical content.
  • Learn to use Excel to standardize an array of values relative to a reference value.
  • Learn to us Excel to compare time series of standardized values (both in a table and graphically).
  • Distinguish between amount of change and rate of change.
  • Gain insight to the meaning, need and utility of index numbers such as the CPI.
  • Make the connection between prices, inflation and the CPI.

Context for Use

I use this module in a quantitative literacy course. The class consists of about 20 students from a variety of nonscience majors. The class is conducted in a new lecture room that is designed to encourage working in groups. Several computers are available at small-group stations around the periphery of the room.

This module is the core of a class session on using ratios to make comparisons. I start the class by distributing copies a 1930's vintage menu from a local restaurant, in which hamburgers are listed at 40 cents, and ask them to budget a dinner for some visitors. This exercise motivates a discussion of how prices change with time, which brings us to index numbers, inflation and the module. The students divide into groups of 2-3 and work through the module at the computers.

Description and Teaching Materials


PowerPoint SSAC2005.HB235.SKB1.1-student version (PowerPoint 1.1MB May27 10)

The module is a PowerPoint presentation with embedded spreadsheets. If the embedded spreadsheets are not visible, save the PowerPoint file to disk and open it from there.

This PowerPoint file is the student version of the module. An instructor version is available by request. The instructor version includes the completed spreadsheet. Send your request to Len Vacher (vacher@usf.edu) by filling out and submitting the Instructor Module Request Form.

Teaching Notes and Tips

The module is constructed to be a stand-alone resource. It can be used as a homework assignment or lab activity. It can also be used as the basis of an interactive classroom activity, with just-in-time teaching of the relevant mathematics (see "Context for Use").

Assessment

The last two slides consist of end-of-module assignments that can be used for assessment.

References and Resources

Data are from U.S. Department of Labor, Bureau of Labor Statistics. The gasoline data are selected from a menu of available time series available at this site.