[Back during undergrad days, I had come across a neat way to use price indices to increase my pocket money. Had shared this as an article in the college’s economics newsletter. I am posting it here so that it may be able to help any students today!]
How often have you heard that economics is unrealistic or completely useless in your life? I’ll try to bust that myth by demonstrating a very cool tool that I observed and successfully used last year. This goes to the heart of every college student’s problems – a lack of adequate pocket money.
We were learning price indices in our macro economics class (SYBA). One day, we conducted a study on the mill workers of Mumbai and the conditions that led to their massive strikes in the seventies. Curiously, we observed that despite periodic increases in their wages (money income), their real income (income deflated to reflect inflation) had seen a steady decline over a decade owing to a steep rise in the prices of their essential commodities. And since the mills were in no position to either increase wages or invest in new technology – they were forced to go on strike!
I felt like a mill worker myself then. Like any college student, I was dependent on a dole of pocket money from my parents to support myself. I would get a weekly sum of Rs. 300. While the mill workers at least had their wages periodically increased – my pocket money had been frozen solid for the past two years. Heaven knows what my real income was! No wonder I couldn’t afford to go out to the movies anymore.
I decided to take matters into my own hands. Of course, I couldn’t mutiny like the mill workers. I would use the power of economics instead!
I took a basket of my usual commodities, assigned weights according to my usage and measured the price increase from the time my pocket money had been stagnant.
(Table 1) Price Index = Sum(IW)/Sum(W) = 5796/36 = 160.25
Thus, inflation for my basket of commodities had been a whopping 60.25% while my money income remained stagnant! Next, I decided to check what my Real Income was;
So my real income had fallen to a mere Rs. 187 a week. (Table 2) Now that explained a lot!
I made a presentation to my parents about this, adding a simple calculation to show what my pocket money ought to be so that I could enjoy the utility of having a real income of Rs. 300.
MY = (300*160.25)/100 = 480.75
My parents were mightily impressed with the presentation. So impressed, in fact, that they decided to increase it to Rs. 500. This was a cool Rs. 19.25 of extra income, a bonus for any rational economist. Thus, I successfully used economics to get an awesome 2/3rd increase in my pocket money and scored a small victory for economics too! <\p>
Are your pockets feeling empty? You know what to do.