Inflation

[maxleng]

i get abit confused on this sometimes..

so this is the gen form we use; A= P( 1+ r/100)^t

does inflation always mean that the original price of the object will rise? (lol im a business noob) im guessing it does.. So when we find the future price we solve for A?

when it asks for the purchasing power in t amount of years do we solve for P?

i had a quick flick through checkpoints and couldnt find any qs on purchasing power  :? im sure ther's been some, if any one finds one could you please post up the question with answer.. thanks!!

[Odette]

i get abit confused on this sometimes..

so this is the gen form we use; A= P( 1+ r/100)^t

does inflation always mean that the original price of the object will rise? (lol im a business noob) im guessing it does.. So when we find the future price we solve for A?

when it asks for the purchasing power in t amount of years do we solve for P?

i had a quick flick through checkpoints and couldnt find any qs on purchasing power  :? im sure ther's been some, if any one finds one could you please post up the question with answer.. thanks!!

Future price is A, as for buying power that's not P, it's A= PR^n (R=1-r/100)

Here's an example ...
Chen has estimated that he will have $10000000 in his retirement fund in 20 years time. If inflation averages 3%p.a. over this time what will be the buying power, in today's dollars of this $1000000?

P=10000000,R= 1- 3/100, n=20
Buying power, A=1000000 x 0.97 ^20= 543794.34
$1000000 in 20 years time will have buying power of $543794.34 in today's dollars

[maxleng]

hmmmm

i read up on it and according to my text book (Essential Maths) it says using:
A= P( 1+ r/100)^t
solve for P to find the purchasing power

weird thing is tho i dont get the same answer as you when u do it your way  :x  :?:  :?:

acording to your example (except using A=1000, why did u pick such a massive number lol)

i get P= 553.68 ( i tried with your A and still it was diff)

[Odette]

hmmmm

i read up on it and according to my text book (Essential Maths) it says using:
A= P( 1+ r/100)^t
solve for P to find the purchasing power

weird thing is tho i dont get the same answer as you when u do it your way  :x  :?:  :?:

acording to your example (except using A=1000, why did u pick such a massive number lol)

i get P= 553.68 ( i tried with your A and still it was diff)

Hmm that's odd :S um i got it from the a+ publishing notes book... so i don't think it's wrong

Future price has a different way it's A= PR ^n , R=1+ r/100

[maxleng]

hmmmm

i read up on it and according to my text book (Essential Maths) it says using:
A= P( 1+ r/100)^t
solve for P to find the purchasing power

weird thing is tho i dont get the same answer as you when u do it your way  :x  :?:  :?:

acording to your example (except using A=1000, why did u pick such a massive number lol)

i get P= 553.68 ( i tried with your A and still it was diff)

Hmm that's odd :S um i got it from the a+ publishing notes book... so i don't think it's wrong

k so i tried both methods on a question in my essential book and my methods gave me the answer in the back of the book  :? yours didnt howver

Q: Ann puts $1000 in her safe, what is its purchasing power in 20 years time if avg inflation over the period is 2.6%

using A= P( 1+ r/100)^t
A= 1000 , t= 20, r=2.6

P= $598.48 (answer in the back of book)

using A=PR^n
A=1000 ( 1 - (2.6/100))^20

A= $590.44


edit: just recapping
A= P( 1+ r/100)^t
A=future amount including inflation
P=purchasing power in the future
(can some one please confirm this?)

no offence to you ofcourse, but id rather take the credibilty of Essential maths than "A+ study books" however i will stand corrected if its wrong.

[hifer]

hey guys, i've read both of ur methods, and i saw the example odette's given on A+ bk, I've gone through a similar problem in TSFX further lectures, the way the guy did was to solve for P substituting the current value into A.

After some research, according to the inflation calculator on Forbes.com
http://www.forbes.com/cms/template/tools/calculator/investment_power.jhtml?_DARGS=%2Ffinance%2Fcalc%2Fgaininflation%2Fdroplet_form.jhtml

If u sub Odette's example into it, Initial Investment = $1000000, Assumed average annual return:0% (since u still have the same amt after 20 years), Assumed Inflation Rate: 3%, Number of years: 20

U'll get the ans:
Nominal value of investment at end of period: $1,000,000.00

Inflation adjusted value of investment at end of period: $543,794.69

Which is the answer obtained by using Odette's way. I think that should be the right answer...

*Note the example specified in the A+ bk is another way of calculating depreciation using 0.97 as the depreciation factor... which means as money inflats, its purchasing or buying power effectively deflats/depreciates

[maxleng]

righttttttt now im massivly confused... if you find a VCAA question can you please post, i will look for one now and see what method they use

[hifer]

I've done all the VCAA papers since 2002, haven't seen these sort of problems so far.. if someone finds it in other papers, i'd love to know as well

[Odette]

So I was right?
Hmm

[maxleng]

So I was right?
Hmm

your way works for your example according to that site, but doesnt for any of the qs in my text book..

[Odette]

So I was right?
Hmm

your way works for your example according to that site, but doesnt for any of the qs in my text book..

Oh well that sucks lol ... hmm how are we supposed to know which method to use then??

I guess we should hope it doesn't come up on the exam *fingers crossed*