Question

1. In 1994 a good desktop computer cost about $4000. In 2015, one cost about $1000. The consumer price index was 156.85 in 1994 and 245.12 in 2015. What is the cost of a 1994 computer in 2015 dollars? By what percent has the inflation-adjusted price of a computer changed since 1994?

2. In terms of speed, memory, and other features, a 2015 desktop is about 120 times more powerful than a 1994 desktop. By what percent has the inflation- and quality- adjusted price of a computer changed since 1994?

3. If nominal GDP in some country rose by 6% from 2014 to 2015 but real GDP only rose 2%, roughly what was inflation in the country from 2014 to 2015?

Answer 1

1. To calculate the inflation from 1994 to 2015, divide the CPI of 2015 with CPI of 1994

245.12/156.85 = 1.56

Now, multiply this factor with the price of desktop in 1994 to get the price in 2015 dollars,

4000* 1.56 = 6240

Calculating the percent change in inflation adjusted prices from 1994 to 2015

(1000-6240)/6240 = -0.83

Prices have decreased by 83%

2. With the increase in quality of desktops in 2015, prices would increase by 120 times in 1994 to reflect the same level of quality as of 2015. Hence, after ajusting for quality prices would be 6240* 1.20 = 7488 and the adjusted change in prices would be (1000-7488)/7488 = -0.86 i.e prices have decreased by 86%

3. Inflation is 4% as by fisher's equation, nominal = real + inflation