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A base year is a year to be measured against it is a

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Unformatted text preview: year as the Base Year, which is the benchmark for yearly comparison. a base year is a year to be measured against, it is a year that had normal activities, no recessions expansions or natural disasters • Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100. going off this model, your income value has gone down because the prices have gone up Calculating the Percentage Change in Prices (as measured by the CPI) • Percentage difference in the CPI from one year to any other year = (CPI later year – CPI earlier year) X 100 __________________________________________________________________________________ CPI earlier year • Inflation: an increase in the price level. {(current year - base year)/base year}*100 if the cpi is rising then that is inflation Are You Beating (CPI) Inflation or is Inflation Beating You? 1. when you are keeping up with inflation, your income is growing at the same rate as inflation 2. when inflation is beating you, your standard of living went down, inflation is growing faster than your income 3. when you beat inflation,, your income increases more than inflation • Nominal Income: the current-dollar amount of a person’s income. • Real Income: nominal income adjusted for price changes. • Real Income (in base year prices) = [(Nominal Income)/CPI]x100 any real variable accounts for inflation when you talk about real income, it is the amount of goods and services you can buy with your money whereas nominal is just your paycheck purchasing power is how much your money can buy log(nominal/price)=log(nominal)-log(price) real=nominal/price Correcting Economic Variables for the Effects of Inflation • To convert (inflate) past wages and prices into current terms: Value in Current Year Dollars = Past Year Nominal Value X [(Price index in current year) ÷ (Price index in past year)] • To convert (deflate) current wages and prices into past year terms: Value in Past Year Dollars = Current Year Value X [(Price index in past year) ÷ (Price index in current year)] Example to inflate wages Dollar Figures from Different Times To convert (inflate) Sam’s wages in 1931 to dollars in 2001: Salary2001 Price level i...
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