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Beerflation February 26, 2011

Posted by tomflesher in Macro, Teaching.
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One of the ways we measure well-being is through purchasing power. There are a lot of unusual measures of purchasing power; possibly the most famous is The Economist’s Big Mac Index, which measures the price of a Big Mac in different countries as a way of checking to see if reported exchange rates are correct.

This depends on idea of purchasing power parity. That is, if we’re going to compare prices in different currencies, the goods we’re comparing have to be precisely the same. The Big Mac is thus an ideal good to use for an exchange rate calculation since the point of branding McDonalds burgers is that they provide a consistent experience.

Another use of purchasing power is to estimate well-being across time periods. If your wage rose at a faster rate than the price level did, you’re better off than you used to be. James over at the Supine Bovine uses the rising price of beer relative to the minimum wage to illustrate that the average entry-level worker (personified as “twenty-somethings who are stuck living with mom and dad”) is worse off in the current economy than he used to be:

So I ask my dad what minimum wage was back in the day and what the price of beer (at a bar) was; he told me it was (about) $4/hour and $0.25, respectively.  This means that on one hour of minimum wage work he could get shitfaced – 16 beers is no small amount.  Anyway, today the minimum wage is $8/hour and a beer at a bar costs no less than $3.50 (but you’re looking at double that at most places).  So my peers can purchase at most two beer per hour worked at minimum wage.  So… beer costs about 8 – 16 times what it used to.

Now, I have a few quibbles with this (mainly to illustrate the problems with using a single good to compute inflation). For one, if That ’70s Show is any indication, bar beer hasn’t always been served in twelve-ounce containers. Adjusting down to an eight-ounce glass, that leaves us with approximately 12 beers. Second, are we discussing the same beer? Even moderate changes in alcohol content can adjust this calculation quite a bit. If, for example, James is using Labatt Blue at 5% alcohol by volume, then substituting the price of Sierra Nevada Pale Ale at 5.6% means that one Sierra Nevada is about 1.12 Blues. That kicks the old figure down to about 10.7 beers, or, equivalently, an old price of .09 hours worked for a beer. (Note that this doesn’t substantially change James’ point.) The current ratio, accepting James’ $3.50 figure as correct, is about .43 hours worked for a beer, meaning the real price of beer has risen approximately 386%. (When I say ‘real price,’ I am indicating that the price is expressed in terms of other goods, rather than in dollars.) It’s impossible to compute a rate of inflation because we don’t know what year James’ dad was talking about.

On the other hand, a lot of twenty-somethings these days have laptops. Just spitballin’.

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