Chapter 8

# Chapter 8 - McGill Faculty of Engineering MIME 310...

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1 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials Chapter 8. Inflation

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2 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 8.1 The current money price of a commodity has evolved as shown in the table below. Variations due to inflation must be removed from the prices. Therefore, convert all prices into 1990 \$, the most recent year. For the 1980 price of 135: Using the GDP index as a measure of inflation, determine how the real price of the commodity has evolved over the period. 135 (277 / 125) = \$299 expressed in 1990 \$ Year Price GDP Index 1980 135 125 1981 141 137 1982 148 151 1983 156 166 1984 163 183 1985 172 199 1986 182 215 1987 217 233 1988 253 247 1989 281 261 1990 328 277
3 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials * Multiplier: Index 1990 / Index Year x = 277 / Index Year x The best way of visualising price trends is to plot the price series. 328 1.000 1990 298 1.061 1989 284 1.121 1988 258 1.189 1987 234 1.288 1986 239 1.392 1985 247 1.514 1984 260 1.669 1983 271 1.834 1982 285 2.022 1981 299 2.216 1980 Price in 1990 \$ Multiplier * Year

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4 McGill Faculty of Engineering MIME 310 Engineering Economy Tutorials 100 150 200 250 300 350 1978 1980 1982 1984 1986 1988 1990 1992 YEAR PRICE (\$) The constant money price decreased until 1986, down to 78% of its original value, and increased thereafter to reach the maximum of the period (140% of its lowest value in 1986, and 9% more than its starting value in 1980). § Average annual rate of change from 1980 to 1986: (234 / 299) 1/6 - 1 = - 4.0% § Average annual rate of change from 1986 to 1990: (328 / 234) 0.25 - 1 = 8.8% § Average annual rate of change from 1980 to 1990: (328 / 299) 0.1 - 1 = 0.9% 234 299 328 Current \$ Constant 1990 \$
5 McGill Faculty of Engineering MIME 310

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## This note was uploaded on 10/06/2009 for the course MIME 310 taught by Professor Bilido during the Summer '08 term at McGill.

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Chapter 8 - McGill Faculty of Engineering MIME 310...

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