Among the useful but boring economic tools is the price index.
With its whimsical Christmas Price Index, PNC Wealth Management of Pittsburgh, Pa. introduces a useful instructional device along with a bit of mirth and merriment by annually computing the cost of the items in the song, "The Twelve Days of Christmas." Examination of this index illustrates issues in constructing any price index. Let's review some highlights of the 2010 Christmas Price Index.
The Partridge in a Pear Tree increased by a modest 1.3 percent. While the price of the pear tree remained constant at $150, the partridge (according to Pittsburgh's National Aviary) increased by 20 percent - from $10 to $12. The practical lesson for students of economics and elementary mathematics is that as the partridge is a miniscule portion of the total package, a large percentage increase in price of the bird represents small weight in the total package. A large percentage of a small number is still a small number.
The price of the Two Turtledoves increased by 78 percent and the Three French Hens by a whopping 233 percent (from $45 in 2009 to $150 in 2010). Again, these large percentage increases represent small portions of the total package. The price of the Four Calling Birds, a larger portion of the package, remained constant at $600.
It's no surprise that the Five Golden Rings increased by a hefty 30 percent due to the high price of gold that varies inversely with the value of the dollar relative to other currencies. The price of gold is further enhanced by anticipation of future inflation due to expansionary monetary policy of the Federal Reserve Bank. While expansionary monetary policy is appropriate during recession and current low inflation and employment, I have argued in these columns that expansionary fiscal policy is the stronger medicine. But we leave that debate for another day.
The price of the Six Geese-a-Laying remained unchanged at $150. The Seven Swans-a-Swimming are the second largest component of the index and characteristically the most volatile. The $5,600 pricetag on the swans represents a 6.7 percent increase over 2009. This large percentage increase on a large item will drive up the total index.
Let's move on to labor components of the index. The long-suffering Eight Maids-a-Milking continue to receive low returns characteristic of the agricultural sector. They are paid minimum wage - their eight hours of labor is valued at a measly $58. Those of us who were raised milking cows were frequently reminded that, however meager our return, we held the "advantage" of steady employment. Of this, we were acutely aware. Few of us saw it as a seductive draw to dairy farming.
In contrast to the Maids-a-Milking, the entertainers, however sporadic their employment - occasional stretches of waiting tables between gigs - not only enjoyed more glamour, but higher returns. The Nine Ladies Dancing are the largest component of the index at $6,294, and, according to the Pennsylvania Ballet Company, enjoyed a 15-percent increase for their services.
The Ten Lords-a-Leaping, representing another large component of the index, received an 8 percent pay increase. We note, however, that neither the Ladies Dancing nor the Lords-a-Leaping received an increase in 2009, so undoubtedly are playing catch up. Yet, such increases during recession are enviable. Even in this moribund economy, there is evident demand for dancing entertainment.
The musicians also fared quite well. The Eleven Pipers Piping and the Twelve Drummers Drumming each enjoyed a 3.1-percent increase in remuneration. Perhaps the increased wages of the musicians compensates for sporadic demand for their services. We note that as the musicians represent a relatively large part of the total Christmas package, a seemingly modest increase weighs heavily on the total index. A small percentage of a large number is still a large number.
The total of all twelve items of the package - the partridge and the pear tree considered as a single item - comes to $23,439.38, a rather steep price for the average sap - er, true love - to cough up. You don't have to be Swiss to chaff at these lofty costs. But wait, we're not done yet.
Recall that there are 12 days of Christmas, and the well-heeled true love gives these gifts over and over, the "true cost" of Christmas. This generates a mathematical series, (1x12) + (2x11) + (3x12) +...+ (10x3) + (11x2) + (12x1) = 364 items costing the generous true love just over $96,000.
The unit of 12 gifts costing $23,439 represents a 9.2 percent increase over 2009. The true cost, $96,000, represents a 10.8 percent increase over 2009. These are the largest price increases since 2003 when the Christmas price index rose 16 percent, and are significantly higher than the rise in consumer price index of 1.1 percent.
The larger than usual difference between the 2010 Christmas price index and the consumer price index illustrates the importance of the components and their relative weights in an index. Neither geese nor swans, for example, are featured in the consumer price index.
Fortunately for the pedestrian true love - and possible gratitude of the recipient for that matter - the range of gift options extends beyond those featured in the Twelve Days of Christmas.
Should one feel constrained to the song, the economy-minded and/or financially strapped true love might opt for the partridge for a modest $10. And looking to the future, the accompanying pear tree for an additional $150 will someday yield dividends in the form of fruit - an additional advantage to being home to the grateful partridge.
With that, a Merry Christmas to my readers - and I always appreciate your greetings and support for this column.
- Monroe resident John Waelti is former Professor of Applied Economics, University of Minnesota; and former Head, Dept. of Agricultural Economics, New Mexico State University. He can be reached at jjwaelti1@tds.net.
With its whimsical Christmas Price Index, PNC Wealth Management of Pittsburgh, Pa. introduces a useful instructional device along with a bit of mirth and merriment by annually computing the cost of the items in the song, "The Twelve Days of Christmas." Examination of this index illustrates issues in constructing any price index. Let's review some highlights of the 2010 Christmas Price Index.
The Partridge in a Pear Tree increased by a modest 1.3 percent. While the price of the pear tree remained constant at $150, the partridge (according to Pittsburgh's National Aviary) increased by 20 percent - from $10 to $12. The practical lesson for students of economics and elementary mathematics is that as the partridge is a miniscule portion of the total package, a large percentage increase in price of the bird represents small weight in the total package. A large percentage of a small number is still a small number.
The price of the Two Turtledoves increased by 78 percent and the Three French Hens by a whopping 233 percent (from $45 in 2009 to $150 in 2010). Again, these large percentage increases represent small portions of the total package. The price of the Four Calling Birds, a larger portion of the package, remained constant at $600.
It's no surprise that the Five Golden Rings increased by a hefty 30 percent due to the high price of gold that varies inversely with the value of the dollar relative to other currencies. The price of gold is further enhanced by anticipation of future inflation due to expansionary monetary policy of the Federal Reserve Bank. While expansionary monetary policy is appropriate during recession and current low inflation and employment, I have argued in these columns that expansionary fiscal policy is the stronger medicine. But we leave that debate for another day.
The price of the Six Geese-a-Laying remained unchanged at $150. The Seven Swans-a-Swimming are the second largest component of the index and characteristically the most volatile. The $5,600 pricetag on the swans represents a 6.7 percent increase over 2009. This large percentage increase on a large item will drive up the total index.
Let's move on to labor components of the index. The long-suffering Eight Maids-a-Milking continue to receive low returns characteristic of the agricultural sector. They are paid minimum wage - their eight hours of labor is valued at a measly $58. Those of us who were raised milking cows were frequently reminded that, however meager our return, we held the "advantage" of steady employment. Of this, we were acutely aware. Few of us saw it as a seductive draw to dairy farming.
In contrast to the Maids-a-Milking, the entertainers, however sporadic their employment - occasional stretches of waiting tables between gigs - not only enjoyed more glamour, but higher returns. The Nine Ladies Dancing are the largest component of the index at $6,294, and, according to the Pennsylvania Ballet Company, enjoyed a 15-percent increase for their services.
The Ten Lords-a-Leaping, representing another large component of the index, received an 8 percent pay increase. We note, however, that neither the Ladies Dancing nor the Lords-a-Leaping received an increase in 2009, so undoubtedly are playing catch up. Yet, such increases during recession are enviable. Even in this moribund economy, there is evident demand for dancing entertainment.
The musicians also fared quite well. The Eleven Pipers Piping and the Twelve Drummers Drumming each enjoyed a 3.1-percent increase in remuneration. Perhaps the increased wages of the musicians compensates for sporadic demand for their services. We note that as the musicians represent a relatively large part of the total Christmas package, a seemingly modest increase weighs heavily on the total index. A small percentage of a large number is still a large number.
The total of all twelve items of the package - the partridge and the pear tree considered as a single item - comes to $23,439.38, a rather steep price for the average sap - er, true love - to cough up. You don't have to be Swiss to chaff at these lofty costs. But wait, we're not done yet.
Recall that there are 12 days of Christmas, and the well-heeled true love gives these gifts over and over, the "true cost" of Christmas. This generates a mathematical series, (1x12) + (2x11) + (3x12) +...+ (10x3) + (11x2) + (12x1) = 364 items costing the generous true love just over $96,000.
The unit of 12 gifts costing $23,439 represents a 9.2 percent increase over 2009. The true cost, $96,000, represents a 10.8 percent increase over 2009. These are the largest price increases since 2003 when the Christmas price index rose 16 percent, and are significantly higher than the rise in consumer price index of 1.1 percent.
The larger than usual difference between the 2010 Christmas price index and the consumer price index illustrates the importance of the components and their relative weights in an index. Neither geese nor swans, for example, are featured in the consumer price index.
Fortunately for the pedestrian true love - and possible gratitude of the recipient for that matter - the range of gift options extends beyond those featured in the Twelve Days of Christmas.
Should one feel constrained to the song, the economy-minded and/or financially strapped true love might opt for the partridge for a modest $10. And looking to the future, the accompanying pear tree for an additional $150 will someday yield dividends in the form of fruit - an additional advantage to being home to the grateful partridge.
With that, a Merry Christmas to my readers - and I always appreciate your greetings and support for this column.
- Monroe resident John Waelti is former Professor of Applied Economics, University of Minnesota; and former Head, Dept. of Agricultural Economics, New Mexico State University. He can be reached at jjwaelti1@tds.net.
