Started class working the LeBron James salary package problem in the homework due today.  The problem as originally stated was wrong – it asked about the effect of five 8% raises when in fact in the five year contract there are only four raises. I think it was a good lesson in the need to read carefully and think for yourself. Teachers make mistakes too – you need to learn when to trust your judgment. If you think something’s fishy, say so, even if you can’t figure out just what’s wrong. (I fixed the problem in the revised text, so future classes will have to learn this lesson in another place.)

I will do the Goldman Sachs problem in class Thursday, after I see how people managed it.

Then we studied inflation, starting with the definition and the Bureau of Labor Statistics calculator.

Discovered how to find out what a raise is really worth when you take inflation into account. Noted that social security is indexed for inflation.

Defined the Consumer (not “Computer”) Price Index. (I said the CPI was relative to the base year 1980. I didn’t say that wasn’t exactly true, that it was an average of the base years 1980-1982. I hope I remember to return to that when we discuss averages.)

I showed how to compute the inflation rate between two years as a ratio of the CPIs. I said they didn’t have to know why that computation worked, but that I would explain it if they wanted me to. To my surprise, most of them did. So I did. Not well, perhaps. Part way through the explanation I think I found a good way to do it:  note first that you can get the inflation rate from any starting amount ($100 is convenient but not necessary). So if the CPI from year A to year B is (say) 125, and from year B to year C it’s (say) 150, then you could start the inflation calculation from B to C with $125. You know that in year C you’ll need $150 to buy that much stuff, so the inflation from year B to year C is $150/$125 = 1.2, corresponding to 20%.

I may go back and put this kind of explanation into the text.

---

blog home page