So we can also use the CPI to see what different wages or prices were at different points in time. We can take a price in the past and see what that price is today using the CPI. Let's go ahead and check out how we do that. So remember, the CPI, we calculate it as a basket of goods, right? We're saying we could buy 10 apples and 100 oranges, right? This is the basket of goods. Well, if we are buying those 10 apples and 100 oranges, let's say in 1990 for, I don't know, $50 but now today, it costs us $100, well, we could say that the $50 in 1990 has the same purchasing power as $100 today, right? Because we're ending up with the same goods. We're still ending up with 10 apples and 100 oranges regardless of what point in time it was and what it cost us. So that's the whole thing with the CPI; it's measuring purchasing power, right? Because we're ending up with that same basket of goods. So we can use this formula to convert dollars from a previous year to the current year. We could say some price in the past, what is that price in today's dollars? So what we're going to do is to calculate the amount in the current year dollars, we'll take the amount in the year T dollars. So whatever year that was and we're going to multiply it. Notice, we're going to using our CPIs here, CPI in the current year divided by the CPI in that year T. Okay? So let's go ahead and apply this formula. You'll see how useful it is once we're doing an example here. Okay? We can use it for all sorts of things and we'll do that here.
So, Johnny and Billy the Millennial are caught in a heated dispute. Billy the Millennial exclaims, "My student loans are enormous. I can barely afford to go to college." Gen X Johnny replies, "You make me sick. Your generation is so lazy. Back in 1975, I worked my way through college making $4 an hour at my part-time job at a movie theater. You just want everything handed to you for free. Not only that, when I left college, I worked my butt off 40 hours a week for just $14,000 annual salary, and purchased my 3 bedroom home for $42,000. Your generation will never have the work ethic that I put in."
So knowing that the CPI was 53.8 in 1975 and 240 in 2016, calculate the following. So we're gonna do this together, and then I want you guys to try B and C here to try and apply this formula. Alright? So let's go ahead and calculate Gen X Johnny's part-time wage in 2016 dollars. It told us that Gen X Johnny was working for $4 an hour at his part-time job at the movie theater back in 1975. Right? So if we want to know what that is worth today in 2016 dollars, well, in 2016, let me do the current year dollars are going to equal. So we're going to take the $4 an hour he was making, and then we're going to use our CPI. So we need our CPI in 1975 and our CPI in 2016 to do this conversion here. Okay. So the $4.1975, we're going to multiply it by today's CPI of 240 divided by the CPI in the past, right? In CPI for time T. So we took the amount in year T, which is $4 times the CPI in the current year which is the numerator here, 240 divided by 53.8. So let's go ahead and see what Gen X Johnny's let me get out of the way here. What Gen X Johnny's part-time wage was in today's dollars. So we'll do 4×24053.8 and we're going to get a wage of $17.84 per hour, right? So this means that Gen X Johnny's part-time wage in 1975 was the equivalent of making $17.84 an hour. And I don't know about you, but I don't know any movie theater willing to pay you $17.84 an hour in today's dollars, but if you find one, hey, let me know. I could use some free popcorn too. Alright. So let's go ahead and pause here. And I want you guys to try and calculate b and c here. Let's find out his annual salary in today's dollars and the price of the home that he bought, that 3 bedroom house that he bought with all his hard-earned money. Cool. Let's do that in b and c and let's do it in the next video.
