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Calculating % Change • You buy a stock at $8 per share • It is now at $10 per share • What % gain did you make? Formula is: [(Ending Price – Beginning Price) / Beginning Price] * 100 (10-8)/8 * 100 = +25% Inflation Measuring Inflation using a Price Index Falling Purchasing Power INFLATION • Economic condition of Average Prices Rising – Lowers the purchasing power of a dollar • Economic numbers must be adjusted for inflation – Real numbers – adjusted for inflation – Nominal numbers – NOT adjusted for inflation • A country sells 10 pairs of blue jeans in both 1999 & 2014. – Blue Jeans cost $20 in 1999 and $40 in 2014 (assume same exact jeans) – What is the change in nominal & real GDP for 2014? • Nominal GDP doubles from $200 to $400 • Real output is unchanged Consumers notice when their paychecks start to buy less! COLA = cost of living adjustment Social security benefits has an annual COLA Historical Inflation • Germany: “hyperinflation” after World War I – Currency became worthless • USA: Late 1970s—Oil Crisis-- 13% inflation – Called “Stagflation” • USA: low inflation since 1985 [2.0-3.0%] • USA speed limit: target for inflation is under 2.5% Some factors: Technology & Globalization Stagflation Low inflation 1985 - 2012 Deflation CPI Index • Consumer Price Index (CPI) measures inflation – Pick any year as a base year which = 100 • Uses a market “basket” of goods & services – Government prices basket monthly – Compares cost of the new basket to old basket • CPI = Current Price Value of Basket X 100 Price Value of Basket in Base Year = CPI Index What is in the CPI’s Basket? 17% Transportation 15% Food and beverages Education and communication 42% Housing 6% 6% 6% 4% 4% Medical care Recreation Apparel Other goods and services CPI Index Calculation Price Value of Basket Use 2005 as base year 2005 2007 CPI Index = $10/$10 X 100 = 100 $10 $12 120 is the CPI Index for 2007 ($12/$10) X 100 = 120 End Result: Current Price Value of Basket X 100 Price Value of Basket in Base Year = CPI Index Inflation rose 20% (120 – 100)/100 X 100 = +20% Worksheet • Creating an Index