Calculating real home prices using the CPI (Context Rich Problem)
This material is replicated on a number of sites as part of the SERC Pedagogic Service Project
This quick problem asks students to calculate real home values using nominal values and the Consumer Price Index.
Students learn to apply the concepts of real and nominal values to a realistic problem.
Context for Use
This problem can be used as an in-class or homework assignment in a Principles of Macroeconomics course. As an in-class assignment, it will take approximately 5-10 minutes of class time.
Description and Teaching Materials
Your parents bought their home in the year 2000 for $195,000. At the peak of the housing market in 2007, their home was valued at $275,000 but by 2012, its estimated market value had fallen to $215,000. Help your parents determine whether the real value of their home increased between 2000 and 2012. The relevant values of the Consumer Price Index are 172.2 in 2000, 207.3 in 2007 and 227.7 in 2012.
Teaching Notes and Tips
Students will need calculators to answer this question. You may want to encourage them to find solutions individually and then to share their calculations with their neighbors.
Instructors can assess the learning of individual students by asking them to hand in their calculations and explanations. Alternatively, instructors can choose to assess overall class understanding of the concept through discussion of the results. The purpose of the assessment will determine whether or not you need a rubric.