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 noticewhen 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 underunder 2.5%

Deflation

Stagflation

Low inflation 1985 - 2012

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 goodsand 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 $102007 $12

($12/$10) X 100 = 120

Use 2005 as base year CPI Index = $10/$10 X 100 = 100

120 is the CPI Index for

2007

End Result:

Inflation rose 20%

(120 – 100)/100 X 100 = +20%

Worksheet

• Creating an Index