Page 499 - The Principle of Economics

MEASURING THE COST OF LIVING
In 1931, as the U.S. economy was suffering through the Great Depression, famed baseball player Babe Ruth earned $80,000. At the time, this salary was extraordi- nary, even among the stars of baseball. According to one story, a reporter asked Ruth whether he thought it was right that he made more than President Herbert Hoover, who had a salary of only $75,000. Ruth replied, “I had a better year.”
Today the average baseball player earns more than 10 times Ruth’s 1931 salary, and the best players can earn 100 times as much. At first, this fact might lead you to think that baseball has become much more lucrative over the past six decades. But, as everyone knows, the prices of goods and services have also risen. In 1931, a nickel would buy an ice-cream cone, and a quarter would buy a ticket at the local movie theater. Because prices were so much lower in Babe Ruth’s day than they are in ours, it is not clear whether Ruth enjoyed a higher or lower standard of liv- ing than today’s players.
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IN THIS CHAPTER YOU WILL . . .
Learn how the consumer price index (CPI) is constructed
Consider why the CPI is an imperfect measure of the cost of living
Compare the CPI and the GDP deflator as measures of the overall price level
See how to use a price index to compare dollar figures from different times
Learn the distinction between real and nominal interest rates