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AGEC 4273 AGRICULTURAL PRICE ANALYSIS DR. ZAPATA INFLATION AND INDEX NUMBERS High levels of inflation are disturbing to most of us. Policymakers, for instance, care about inflation because it can harm economic performance. Thus, one of their goals is long-run price stability. Previous research on this subject has shown that when inflation is high over long periods of time, inflation uncertainty, real growth variability, and relative price volatility tend to rise. Many producers and processors of agricultural commodities often voice that they are economically disadvantaged, when compared to producers in other sectors of the economy, because the prices they pay for agricultural inputs are much higher than what they receive for agricultural products. When inflation is high, consumers claim, the purchasing power of the dollar goes down because wages and salaries do not tend to increase as fast as inflation. Also, there is the added burden of taxes. INFLATION, defined in simple terms, is an increase in prices, that is, a rise in the general level of prices which generally implies a decrease in the purchasing power of the dollar, or any other monetary unit. The term general level of prices refers to a weighted average of prices for a given set of goods during some specified period of time. In general, it can be said that the value of the dollars decreases when inflation increases. The price of agricultural commodities is the monetary unit commanded by the commodity and is usually referred to as the nominal price . For instance, the price of corn, wheat and soybeans is measured in $/bushel, whereas the price of rice is measured in $/100 pounds (cwt). In applied price analysis, a distinction is made between NOMINAL and REAL prices. Real prices are not more than nominal prices 1
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adjusted for inflation. This correction for inflation requires the use of a deflator that measures movements in inflation; the deflator is called an INDEX NUMBER. First, lets
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This note was uploaded on 10/21/2008 for the course AGEC 4273 taught by Professor Zapata during the Spring '08 term at LSU.

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