U.S. Government II
Mr. Rueger
Was Babe Ruth Under Paid?
Directions:
In 1931, Babe Ruth made $80,000 per year. Was the Great Bambino overpaid or
underpaid according to today's standards? On average, Major League Baseball
(MLB) players today earn $2,272,620 per year. This lesson will provide you
with tools for answering this question. [Note: prices have also risen over this
time period making this question more complicated than it appears.] Determine
whether Babe Ruth was overpaid or underpaid in comparison to today's MLB
players. This question can be answered by using the Consumer Price Index (CPI)
to adjust Ruth's salary for changes in the price level.
Process:
The Consumer Price Index (CPI) can be used to compare dollar figures from different times
accurately. You may have heard your grandparents telling you that they remember when a gallon of gas
cost a quarter or a loaf of bread cost a dime. But those numbers by themselves don't tell us how
expensive things were in the old days compared to now. It's the same with salary figures from the past.
For example in 1931 when Babe Ruth had a batting average of .373 with 46 home runs and 163 RBIs, an
ice-cream cone cost five cents and going to a movie in a theater cost a quarter. Ruth's salary then was
$80,000 per year. But it is not clear from that salary figure alone whether Ruth enjoyed better or worse
purchasing power than today's players.
In order to investigate this question, a couple of concepts from economics must
be introduced. First, the inflation rate: It is the percentage of increase in the
price level of the economy as measured by the CPI. The CPI tracks the overall
price change for a fixed basket of goods and services bought by a typical
working-class urban family over time. It is a measure of price changes in
consumer goods - also known as the "cost of living index." The CPI "basket"
contains goods and services that have been chosen for the CPI survey. Imagine
a shopping basket loaded up with fruit, chocolate, meat, chips and other
items from each of the nine groups used in the organization of the CPI. The
items in the basket must be identical in quantity and quality over a period of
time.
We can also distinguish between current dollars and constant dollars. The value of the income (or
purchase) at the time it was actually earned (or spent) is measured in current dollars. Current dollars
are dollars from other time periods converted into present-day dollars, in order to factor out the effects
of inflation. Adjusting a current dollar figure to show the impact of inflation on the purchasing power
converts the figure into constant dollars. Constant dollars eliminate the changes in the purchasing
power of the dollar over time. The result is a series as it would exist if the dollar had a purchasing
power equal to its purchasing power in the base year. For example, it is more useful to compare the
change in annual wages measured in constant dollars than in current dollars because of the effect of
inflation on purchasing power. While wages in current dollars may have risen over time, wages in
constant dollars may have declined because prices of goods and services that workers bought rose more
than wages.
U.S. Government II
Mr. Rueger
Given all of this, how do we actually make the comparison? Well, this is done using a simple formula as
follows:
Salary in Constant Dollars (Recent Year) = Salary in Current Dollars (Old Year)*(CPI in Recent
Year/CPI in Old Year)
[Using data on the consumer price index we can determine what Ruth's constant dollar salary was as
follows:
Ruth salary in 2014 Constant Dollars= Ruth Salary in 1931 Current Dollars * (CPI in 2015/CPI in
1931)
$__________________ = $80,000 * (_________/_______)
[Ruth's salary in constant 2015 dollars was a little over $1 million per year. This is clearly lower than
even the average baseball player makes today, and much less than the stars make (Alex Rodriguez of the
New York Yankees is the highest-paid MLB player at $22 million per year). In 2015, more than 400 MLB
players made the same as or more than the great Babe Ruth.]
Assessment Activity:
President Hoover made $75,000 per year in 1931. President Obama earned $400,000 in 2015. Who
earned more in constant, or 2015, dollars?
Hoover actually earned: $_____________________ = $75,000 * (______________/__________)
Who made more money?
By how much?
Fill in the following activity using the formula [Salary in Constant Dollars (Recent Year) = Salary in
Current Dollars (Old Year)*(CPI in Recent Year/CPI in Old Year)],
President Truman made $100,000 in 1949, today President Obama makes $400,000. How much would
President Truman’s salary be in 2015?
$_____________________________________
Legendary Colts quarterback, Johnny Unitas, made $7,000 in 1956. Is this more than the $14,000,000
former Colts quarterback, Peyton Manning makes?
$______________________________________
Lyndon Johnson made $200,000 as President in 1969. Would this be more than President Obama’s salary
of $400,000?
$______________________________________
Michael Jordan made $33,140,000 during the 1997-1998 season. How much would this be in 2015
dollars?
$______________________________________