E251x.F11.W15.Asset Valuation.Clsnts

E251x.F11.W15.Asset Valuation.Clsnts - ECON 251x Fall 2011...

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ECON 251x Fall 2011 Week 15: Financial Asset Valuation 1. Measuring the Cost of Living: (Ch.3 P. 100-105) A . 2011 Consumer Price Index: ( Laspeyres Index) :(CPI) = P 11 x Q 10 / P 10 x Q 10 where 2010 is the base year. Q 10 represents an average basket of consumer goods purchased in 2010. CPI overstates the increase in the cost of living. For current CPI data : BLS Consumer price index http://bls.gov B. GDP Deflator( Paasche Index) P 11 x Q 11 / P 10 x Q 11 is a broader index of prices throughout the economy. Understates the increase in the cost of living. C . Real vrs Nominal Variables : 1. Nominal means in terms of current prices . (current dollars) What we see are all nominal prices. 2. Real means adjusted for inflation. (constant dollars) D . Real 11 = Nominal 11 / (CPI 11 /100) Ex. Suppose the CPI index is 110 for 2011 and the base year is 2010. Then to express 2011 GDP in constant 2010 dollars, adjusted for inflation, Real 2011 GDP = $ 1,000/ (110/100) = $ 1,000/ 1.1 = $ 909.09 E. The CPI overstates the rate of inflation. 2. The interrelationships between the Present Value (PV); Future Value (FV) and the interest rate (i%) of Financial assets and investments.
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