CPI and Salary by City

Dear Professor Cram:

I'm having difficulty with this economics question and desperately need your help. You are offered a job in Boston that pays $80,000 per year and a job in Fort Worth that pays $60,000 per year. Fort Worth's CPI is 110 and Boston's CPI is 160. What is the Boston job's purchasing power in Fort Worth dollars?

Susie A., South Carolina

Thanks for your question, Susie. This is classic CPI-salary problem, one that you may see for real after you graduate and start looking for a full-time job.

In economics, CPI (or consumer price index) is a relative value we can use to compare the cost of consumer goods in different parts of the country. A higher CPI value indicates a more expensive place to live, while a lower CPI indicates a relatively cheaper place. The base CPI value is 100.

To evaluate your problem, let's begin by dividing the Boston salary by its CPI value:

  • $80,000/160 = $500

This means that the Boston salary is worth $500 for every CPI point. Since Fort Worth has a CPI of 110, we'll multiply $500 by 110:

  • $500 x 110 = $55,000

Thus, the Boston offer is worth $55,000 in Fort Worth dollars. (Since the Fort Worth offer is worth $60,000, if money was your only consideration you'd probably want to take the Fort Worth job.)

Happy job hunting!

Professor Cram