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Inflation Rate Calculation · Acedra
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Inflation Rate Calculation
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0:00
hello in this video we're going to look at calculating the inflation rate using both the consumer price index and the gdp deflator so here is our economy we have two goods almonds and dog toys we got the price and quantity in each year 2020 will be our base year we're going to use the table to calculate the inflation rate in 2021 using the consumer price index or cpi and then doing the same thing but this time using the gdp deflator so let's first calculate the inflation
0:34
rate using the gdp deflator we're going to first calculate nominal gdp in 2020. so nominal gdp in 2020 is going to be the output valued at current dollars so eight times a hundred plus twelve times forty that is our current dollar gdp for two thousand and twenty and we get a value of one thousand two hundred eighty real gdp in 2020 we're gonna multiply our output in 2020 by base year prices our base year prices our 2020 prices so we're going to get the same calculation
1:13
it's just going to be 8 times 100 and 12 times 40. so just valuing that output at base year prices at 2020 prices in other words and we get again 1 280. the gdp deflator is defined as nominal gdp over real gdp all multiplied by a hundred so the gdp deflator in 2020 nominal divided by real multiplied by 100 will just equal a hundred and you should know that the gdp deflator will always equal 100 in the base year now we're going to calculate nominal gdp in 2021 so the current dollar gdp
1:55
take our output in 2021 and multiply it by the current prices so 9 times 105 plus 12.25 times 44 nominal gdp in 2021 is 1 484 real gdp in 2021 we're going to take the base year prices and multiply it by the 2021 quantities so 8 times 105 plus 12 times 44. so we're taking our output in 2021 and valuing that output at base year prices doing that we get real gdp in 2021 of 1 368 forming our gdp deflator then taking the nominal gdp dividing it by the real gdp for that year all
2:50
multiplied by 100 we get a gdp deflator in 2021 of 108.48
3:00
now to calculate the inflation rate we're going to just use our percentage change formula we're going to take the gdp deflator in 2021 subtract from it the gdp deflator in 2020 that will all be divided by the gdp deflator in 2020 and we'll get it out of decimal format and multiply it by a hundred so plugging in our values and the hundreds cancel and we're left with just eight point four eight point four eight percent so in 2021 prices rose on average eight point four eight
3:36
percent using the gdp deflator method okay turning our attention to the cpi method let's calculate the inflation rate using the consumer price index the consumer price index in 2020 is going to be the current cost of the base year basket divided by the base year cost of the base year basket so our base year basket is going to be 100 almonds and 40 dog toys so the current cost of that base your basket is eight times a hundred plus twelve times forty and the base your cost of that base your
4:12
basket is going to be just 8 times 100 plus 12 times 40. and that will just leave us with a cpi in 2020 of 100. the cpi in 2021 current cost of the base year basket divided by the base year cost of the base year basket so this time the current cost of the basket is 9 times 100 plus 12.25 times 40. so our numerator is slightly different but our denominator is still the same the base year cost of the base year basket will still be 1280. so doing our calculations the cpi in 2021 is 108.6
5:00
and now we can calculate the inflation rate by looking at the percentage change going from 100 to 108.6 so the inflation rate using the percentage change formula plugging in our values for the cpi so we get an inflation rate slightly different than the gdp deflator method here we get an inflation rate using the cpi of 8.6 percent okay i'll stop here
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