Equivalence Calculations Under Inflation
1
HOPE FOUNDATION’S
INTERNATIONAL INSTITUTE OF IFORMATION TECHNOLOGY, (I²IT)
+91 20 22933441 / 2www.isquareit.edu.in
Information System & Engineering Economics
EQUIVALENCE CALCULATIONS UNDER INFLATION
PREPARED BY: PROF. KIMI B. RAMTEKE
Equivalence Calculations under
Inflation
Contents
–
CPI
–
Inflation
–
Deflation
–
General Inflation Rate
–
Average Inflation Rate
–
Basic terms in Cash Flow
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
2
Consumer Price Index (CPI)
•
Definition:
A statistical measure of change, over
time, of the prices of goods and services in
major expenditure groups—such as
–
food
–
housing
–
cloths
–
transportation
–
medical care typically purchased by the consumers
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
3
Consumer Price Index (CPI) cont…
•
The CPI compares the cost of a sample
“market basket”
of goods and services in a
specific period with the cost of the same
market basket in an earlier reference period.
•
This reference period is designated as the
base period.
Dept. of Comp. Engg.
4
Base
Period
2009
Future
Period
2012
CPI
Compares
both
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
Inflation
•
Definition:
The term used to describe a
reduction in purchasing power evidenced in an
economic environment of rising prices.
•
In other words, when prices of the products
and services increase, we buy less quantity with
same amount of money i.e.
the value of money
is decreased
.
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
5
Example of Inflation
The quantity of items we purchase today at a cost of Rs.1000 is
less than that was purchased 5 years ago
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
6
5 Yrs Ago
Today
Deflation
•
Definition:
It is the opposite of inflation: It is an
increase in purchasing power, evidenced by
falling prices.
•
Due to effect of deflation, more can be
purchased with same amount of money in
future time period than that can be purchased
today.
The value of money increases.
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
7
General Inflation Rate
•
Definition:
It is an average inflation rate
based on the CPI. An annual general inflation
rate can be calculated by the following
equation:
•
Formula:
•
Where,
=
General inflation rate for period n
•
=
Consumer price index at end period n
•
=
Consumer price index at base period n-1
8
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
Average inflation rate
•
The price changes of specific, individual commodities
do not always reflect the general inflation rate.
•
We can calculate an
average inflation rate
for a
specific commodity (
j
) if we have an index (that is, a
record of historical costs) for that commodity.
Formula:
F=P(1+f)^n
where, P=Present value
F= Future Value
n= period
f =
average inflation rate
9
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
Basic Terms in Project cash flows
•
Project cash flows may be stated in one of
two forms:
–
Actual dollars (
A
n
):
Dollar amounts that reflect
the inflation or deflation rate.
–
Constant dollars (
A'
n
):
Dollar amounts that
reflect the purchasing power of year zero dollars.
10
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
References
•
http://wps.prenhall.com/ecs_park_fee_2/87/
22279/5703621.cw/index.html
•
http://nptel.ac.in/courses/105103023/29
•
https://www.youtube.com/watch?v=Vi3Q1yp
Nw3M
Hope Foundation’s International Institute of Information Technology, I²IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057
Tel - +91 20 22933441 / 2 / 3 | Website -
www.isquareit.edu.in
; Email -
info@isquareit.edu.in
11
THANK YOU
For further information please contact
Prof. Kimi Ramteke
Department of Computer Engineering
Hope Foundation’s International Institute of Information Technology, I²IT
Hinjawadi, Pune – 411 057
Phone - +91 20 22933441
www.isquareit.edu.in
|
kimir@isquareit.edu.in
12
Equivalence calculations under inflation involve assessing the impact of changing prices on the purchasing power of money over time. Key concepts include CPI, inflation, and comparing costs across different periods. This content discusses how inflation affects consumer behavior and provides insights into calculating equivalent values in different economic scenarios.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
E N D
Presentation Transcript
Information System & Engineering Economics EQUIVALENCE CALCULATIONS UNDER INFLATION PREPARED BY: PROF. KIMI B. RAMTEKE HOPE FOUNDATION S INTERNATIONAL INSTITUTE OF IFORMATION TECHNOLOGY, (I IT) www.isquareit.edu.in +91 20 22933441 / 2 1
Equivalence Calculations under Inflation Contents CPI Inflation Deflation General Inflation Rate Average Inflation Rate Basic terms in Cash Flow Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 2
Consumer Price Index (CPI) Definition: A statistical measure of change, over time, of the prices of goods and services in major expenditure groups such as food housing cloths transportation medical care typically purchased by the consumers Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 3
Consumer Price Index (CPI) cont The CPI compares the cost of a sample market basket of goods and services in a specific period with the cost of the same market basket in an earlier reference period. This reference period is designated as the base period. CPI Compares both Base Period Future Period 2009 2012 Dept. of Comp. Engg. Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 4
Inflation Definition: The term used to describe a reduction in purchasing power evidenced in an economic environment of rising prices. In other words, when prices of the products and services increase, we buy less quantity with same amount of money i.e. the value of money is decreased. Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 5
Example of Inflation The quantity of items we purchase today at a cost of Rs.1000 is less than that was purchased 5 years ago Today 5 Yrs Ago Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 6
Deflation Definition: It is the opposite of inflation: It is an increase in purchasing power, evidenced by falling prices. Due to effect of deflation, more can be purchased with same amount of money in future time period than that can be purchased today. The value of money increases. Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 7
General Inflation Rate Definition: It is an average inflation rate based on the CPI. An annual general inflation rate can be calculated by the following equation: Formula: Where, = General inflation rate for period n = Consumer price index at end period n = Consumer price index at base period n-1 Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 8
Average inflation rate The price changes of specific, individual commodities do not always reflect the general inflation rate. We can calculate an average inflation ratefor a specific commodity ( j) if we have an index (that is, a record of historical costs) for that commodity. Formula: F=P(1+f)^n where, P=Present value F= Future Value n= period f =average inflation rate Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 9
Basic Terms in Project cash flows Project cash flows may be stated in one of two forms: Actual dollars (An): Dollar amounts that reflect the inflation or deflation rate. Constant dollars (A'n): Dollar amounts that reflect the purchasing power of year zero dollars. Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 10
References http://wps.prenhall.com/ecs_park_fee_2/87/ 22279/5703621.cw/index.html http://nptel.ac.in/courses/105103023/29 https://www.youtube.com/watch?v=Vi3Q1yp Nw3M Hope Foundation s International Institute of Information Technology, I IT, P-14 Rajiv Gandhi Infotech Park, Hinjawadi, Pune - 411 057 Tel - +91 20 22933441 / 2 / 3 | Website - www.isquareit.edu.in ; Email - info@isquareit.edu.in 11
THANK YOU For further information please contact Prof. Kimi Ramteke Department of Computer Engineering Hope Foundation s International Institute of Information Technology, I IT Hinjawadi, Pune 411 057 Phone - +91 20 22933441 www.isquareit.edu.in | kimir@isquareit.edu.in 12
