of this economics question? The calculation of income at current prices gives the figures for nominal income. In order to calculate real changes, income and other variables should be calculated at constant prices of the base year ( previous year). This method neutralizes the effect of changes in price level and expects an analysis of factors other than price that brought a change in the variable. For example:
Consumer expenditure in 2004 was $150m, price index= 100.
Consumer expenditure in 2005 was $165m, price index=105.
Consumer expenditure increase from $150m to $165m. If calculated at current prices, this is a 10% increase in expenditures. Real change in expenditures can be calculated using the following formula, taking year 2004 as the base year:
Real expenditure= Nominal expenditures 'multiplied by' (Price index of base year 'divided by' Price index of current year), i.e. 165 'multiplied by' (100 'divided by' 105) = 157.14
The calculation of consumer expenditures at constant prices of the base year shows an increase of 4.67% in real terms.
Now the thing that i did not understand is how is the increase is 4.67%? I would really appreciate help from you all. Also help me about the basic techniques of nominal and Real changes, as economica is a totally new subject for me and I have to clear it.
Any help would be greatly appreciated.
Thank you all of you. Take care.
Consumer expenditure in 2004 was $150m, price index= 100.
Consumer expenditure in 2005 was $165m, price index=105.
Consumer expenditure increase from $150m to $165m. If calculated at current prices, this is a 10% increase in expenditures. Real change in expenditures can be calculated using the following formula, taking year 2004 as the base year:
Real expenditure= Nominal expenditures 'multiplied by' (Price index of base year 'divided by' Price index of current year), i.e. 165 'multiplied by' (100 'divided by' 105) = 157.14
The calculation of consumer expenditures at constant prices of the base year shows an increase of 4.67% in real terms.
Now the thing that i did not understand is how is the increase is 4.67%? I would really appreciate help from you all. Also help me about the basic techniques of nominal and Real changes, as economica is a totally new subject for me and I have to clear it.
Any help would be greatly appreciated.
Thank you all of you. Take care.