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 & –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 [ %] underUSA speed limit: target for inflation is under 2.5%

Deflation Stagflation Low inflation Some factors: Technology & Globalization

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 Price Value of Basket in Base Year X 100 = CPI Index

What is in the CPI’s Basket? 17% Transportation 15% Food and beverages Medical care 6% Recreation 6% Apparel 4% Other goods and services 4% 42% Housing 6% Education and communication

CPI Index Calculation Current Price Value of Basket Price Value of Basket in Base Year X 100 = CPI Index Price Value of Basket 2005 $ $12 ($12/$10) X 100 = 120 Use 2005 as base year CPI Index = $10/$10 X 100 = is the CPI Index for 2007 End Result: Inflation rose 20% (120 – 100)/100 X 100 = +20%

Worksheet Creating an Index