Lesson on "Real" vs. "Nominal"

Here's a lesson idea that builds off my post in "More Than Just Invisible Hands" about the hidden shift in state funding for students attending the state system universities (Post on February 7, 2009, "The Hidden Shift in Higher Education Funding").



If you want to adjust a series of current dollar values (a.k.a "nominal") like wages, prices, or investment returns, for inflation (a.k.a. "real"), you first need a price index. A price index is created by taking a basket of goods or services and tracking the purchasing power needed to buy the same basket over time. The basket, theoretically, doesn't change resulting in a consistent measure of inflation. There are many price indices available for use depending on what you want to adjust for inflation. The Bureau of Labor Statisics is a good source for price indices and so is Economagic.



The Consumer Price Index is a common price index used to adjust many statistics for inflation. One example is the Cost of Living Adjustment (COLA), that adjusts the amount retirees receive in Social Security benefits. The purpose of the SS system is to provide retirees with an adequate amount of income to live on consistent (to a point) with the standard of living they had when they retired. If SS benefits were not adjusted for inflation, then the purchasing power of the money they receive would buy less and less over time.



There are other price indices that may be better measures of inflation for specific goods or services. If you were interest in adjusting wages for inflation then you would use the "employment cost index" and you could choose a version of the ECI for the particular occupation or industry.



In the post, I was interested in adjusting the appropriation from the state and the cost of tuition and fees for a general measure of inflation so I chose the CPI for all goods and services in the Mid-Atlantic region (since the data represents PA).



Here is an excerpt from my excel spreadsheet.

Year	Nominal State Appropriation per FTE student	CPI - PA,NJ,DE,MD	Real or Inflation Adjusted Appropriation per FTE Student
1983-84	$3,003	105.6
1984-85	$3,182	110.7	$3,148
1985-86	$3,349	112.6	$3,202
1986-87	$3,449	118.9	$3,381
1987-88	$3,497	125.6	$3,572
1988-89	$3,596	129.9	$3,694
1989-90	$3,751	139.4	$3,964
1990-91	$3,711	144.4	$4,106
1991-92	$3,980	147.5	$4,195
1992-93	$3,916	151.3	$4,303
1993-94	$4,196	155.4	$4,419
1994-95	$4,432	159.1	$4,524
1995-96	$4,553	164.3	$4,672
1996-97	$4,567	166.4	$4,732
1997-98	$4,572	169	$4,806
1998-99	$4,736	172.9	$4,917
1999-00	$4,869	177.5	$5,048
2000-01	$4,921	179.9	$5,116
2001-02	$4,842	185.3	$5,269
2002-03	$4,575	189	$5,375
2003-04	$4,294	197.8	$5,625
2004-05	$4,376	204.9	$5,827
2005-06	$4,408	211.6	$6,017
2006-07	$4,564	219.03	$6,229
2007-08	$4,669	218.19	$6,205

FTE = Full Time Equivalent student



As you can see, once you adjust the nominal appropriation for inflation, it starts to fall short of the inflation adjusted value around 1988. By the end of 2008, the two measures are $1600 apart.



To calculate the "real" column, use the following equation:

where t = year of the inflation adjusted value

By adjusting the data for inflation, we can see that despite the nominal value per student increasing every year, the inflation adjusted value should be much more. In other words, the actual contribution from the state subsidizes a lot less of a college education in 2008 than it did in 1984 and students are paying more for their education.