Quiz Thursday 11 February
Your brother's boyfriend is an accountant. He earns $40,000 after taxes in Tallahassee. He has been offered a job in New York City, where he would earn $52,000 after taxes. He checked with the Bureau of Labor Statistics, and decided that if the CPI in Tallahassee was 100, it would be 125 in New York. If he does not change his consumption pattern, will his real income go up if he takes the job in New York? Why?
There are several ways to get to the answer. Ruth's was to say, the CPI numbers tell me that what costs $100 in Tallahassee costs $125 in New York; so to buy what costs me $40,000 in Tallahassee would cost me 25% more, $50,000, in New York. But he will earn $52,000 in New York -- so he will be able to buy more, his real income will go up.
Another way would be to say the ratio of his money incomes, [$52,000/$40,000], is 1.3 -- i.e. the same as 130 to 100 -- and that is bigger than the CPI difference (125 to 100) -- so his real income will go up ['real' is 'money' divided by price level index].