Calculating % Change

1
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
2
Inflation

• Measuring Inflation using a Price Index

3
Falling Purchasing Power
4
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

5

Consumers notice when their paychecks start to
buy less!
COLA cost of living adjustment Social security
benefits has an annual COLA
6
Historical Inflation

• Germany hyperinflation after World War I
• Currency became worthless
• USA Late 1970sOil Crisis-- 13 inflation
• Called Stagflation
• USA low inflation since 1985 2.0-3.0
• USA speed limit target for inflation is under
  2.5

7
Low inflation 1985 - 2012
8
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

9
What is in the CPIs Basket?
10
CPI Index Calculation

• Price Value of Basket
• 2005 10
• 12
• (12/10) X 100 120

End Result Inflation rose 20 (120 100)/100
X 100 20
11
Worksheet

• Creating an Index