I'Table 14-1lists the historic prices of sending a first-classletter in the United States via
the Postal Service from 1970 to 2003. The cost is given both in terms of dollars (cents) and
as measured by a fictitious price index that we could call the letter cost index (LCI).
Notice two important aspects of the LCI. First, as with all cost or price indexes; the
numbers used to express the change in price over time are based on some base year. With
price (or cost) indexes the base year is always assigned a value of 100. Our LCI has a base
year of 1970-thus for 1970, LCI = 100. The letter cost index value given in subsequent
years is stated in relation to 1970 as the base year. A second aspect to notice is that the LCI
changes only when the cost of first-classpostage changes. In years when this quantity does
not change (in other words, there was no price increase), the LCI is not affected. These
general observations apply to all price indexes.
In general, engineering economists are the "users" of cost indexes such as our hy-
pothetical LCI. That is, cost indexes are calculated or tabulated by some other party, and
our interest is in assessing what the index tells us about the historical prices and how
these may affect our estimate of future costs. However, since we are "users" of indexes,"
rather than "compilers," it may be of interest to illustrate how the LCI in Table 14-1 was
calculated.
In Table 14-1, the LCI is assigned a value of 100 because 1970 serves as our base year.
In the following years the LCI is calculated on a year-to-year basis based on the annual
percentage increase in first-class mail. Equation 14-2 illustrates the arithmetic used.
LCI year,n= ([(cost(n)- cost 1970)/cost 1970] x 100%) + 100 (14-2)
-- ___ _.__n ------PriceChangewith Indexes 451
TABLE14-1 Historic Prices of First-Class Mail, 1970-2003, and Letter Cost Index
Cost of First- Annual Cost of First- Annual
Year,n ClassMail LCI Increasefor n Year,n ClassMail LCI Increasefor n(^1970) $0.06 100 .0.00% (^1987) $0.22 367 0.00%
1971 0.08 133 33.33 1988 0.25 417 13.64
1972 0.08 133 0.00 (^1989) 0.25 417 0.00
1973 0.08 133 0.00 1990 0.25 417 0.00
1974 0.10 (^166) 25.00 1991 0.29 (^483) 16.00
1975 0.13 216 30.00 1992 0.29 483 0.00
1976 0.13 216 0.00 1993 0.29 483 0.00
1977 0.13 216 0.00 (^1994) 0.29 483 0.00
(^1978) 0.15 250 15.74 1995 0.32 533 10.34
1979 0.15 25Q 0.00 1996 0.32 (^533) 0.00
1980 0.15 (^250) 0.00 1997 0.32 533 0.00
1981 0.20 333 33.33 1998 0.33 550 3.13
1982 0.20 333 0.00 1999 0.33 (^550) 0.00'
1983 0.20 333 0.00 2000 0.33 550 0.00
1984 0.20 333 0.00 2001 0.34 567 3.03
(^1985) 0.22 367 10.00 2002 0.37 617 8.82
1986 0.22 367 0.00 2003 0.37 (^617) 0.00