![]() ![]() Types of Analysis Method Market Interest rate (i) Inflation-free interest rate (i') In Constant Dollars In Actual Dollars Constant Dollar Analysis Actual Dollar Analysis Deflation Method Adjusted-discount method 3 $1,260 (1 + 0.08) = $1,000 Conversion from Actual to Constant Dollars $1,260 $1,000 3 3 Actual Dollars Constant DollarsĮxample 4.4 Conversion from Actual to Constant DollarsĮquivalence Calculation Under Inflation 1. We will assume that the base year is always time zero unless we specify otherwise.ģ $1,000 (1 + 0.08) = $1,260 Conversion from Constant to Actual Dollars $1,260 $1,000 3 3 Actual Dollars Constant DollarsĮxample 4.3 Conversion from Constant to Actual Dollars ![]() Constant (real) Dollars (A'n): Represents constant purchasing power independent of the passage of time.Usually, these amounts are determined by applying an inflation rate to base-year dollar estimates. Actual Dollars (An ): Estimates of future cash flows for year n that take into account any anticipated changes in amount caused by inflationary or deflationary effects.Inflation Terminology – IIThe effect of inflation into economic analysis The average inflation rate over 3 years is General Inflation Rate ( f ) Average inflation rate based on the CPIĮxample 4.2: Yearly and Average Inflation Rates What are the annual inflation rates and the average inflation rate over 3 years? Solution Inflation rate during year 1 (f1): ($538,400 - $504,000) / $504,000 = 6.83%. $100 ( 1 + 0.04) ( 1 + 0.08) = $112.32 Step 2: Find the average inflation rate by solving the following equivalence equation. $112.32 0đ 2 $100 Average Inflation Rate (f ) Fact: Base Price = $100 (year 0) Inflation rate (year 1) = 4% Inflation rate (year 2) = 8% Average inflationrate over 2 years? Step 1: Find the actual inflated price at the end of year 2. This reference period is designated as the base period. Measuring Inflation Consumer Price Index (CPI):the CPI compares the cost of a sample “market basket” of goods and services in a specific period relative to the cost of the same “market basket” in an earlier reference period. ![]() General Inflation Rate ( f): the average inflation rate calculated based on the CPI for all items in the market basket. Consumer Price Index (CPI): a statistical measure of change, over time, of the prices of goods and services in major expenditure groups-such as food, housing, apparel, transportation, and medical care - typically purchased by city consumers Average Inflation Rate ( f ): a single rate that accounts for the effect of varying yearly inflation rates over a period of several years. Its components are broken down by industry sector, product. Producer Price Index (PPI): a statistical measure of wholesale industrial price change, compiled monthly by the BLS, to evaluate wholesale price levels in the economy. 20.38% $1.57 / gallon $1.25 / gallon Price change due to deflation You can now purchase 80 gallons of unleaded gas. $100 $100 -2 -1 0 1 -2 -1 0 1 You could purchase 63.69 gallons of unleaded gas a year ago. 25% $2.00 / unit $2.50 / unit Price change due to inflation The $100 in year 2003 has only $80 worth purchasing power of 1990 You can only buy 40 Big Macs in year 2003. Using the equation above, Ahmed’s true earning power is only $3.85 per hour! He usually wake up at 6:30 AM to get ready for work, and return home around 6:30 PM each day totaling about 12 hours per day, 60 hours per week, or approximately 260 hours per month. His taxes and living expenses total $4,000 a month.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |