Question

Table below gives the annual rate of inflation during a 5-year period.
2000 2001 2002 2003 2004
Annual rate of inflation 1.8% 2.1% 2.9% 2.4% 2.7%
If a nominal house price at the end of 2000 was $10.8 million, find the real house price
adjusted to prices prevailing at the end of the year 2003. Round your answer to three
significant figures.

Answer 1

Sol:

Nominal house price at the end of 2000 = $10.8 million

Annual rate of inflation = 2000 - 1.8%, 2001 - 2.1%, 2002 - 2.9%, 2003 - 2.4%, 2004 - 2.7%

To compute the real house price adjusted to prices prevailing at the end of the year 2003:

Real house price at the end of the year 2003 = Nominal house price x (1 + Annual rate of inflation till 2003)

Real house price at the end of the year 2003 = 10.8 million x (1 + 1.8%) x (1 + 2.1%) x (1 + 2.9%) x (1 + 2.4%)

Real house price at the end of the year 2003 = 10.8 million x (1 + 0.018) x (1 + 0.021) x (1 + 0.029) x (1 + 0.024)

Real house price at the end of the year 2003 = 10.8 million x 1.018 x 1.021 x 1.029 x 1.024

Real house price at the end of the year 2003 = $11.828 million

Therefore real house price adjusted to prices prevailing at the end of the year 2003 will be $11.828 million.