Model 10 Inflation
Model 10 Inflation
Model 10 Inflation
300
200
100 Year
10-3 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Definitions
Inflation rate (f)
the annual percentage of increase in prices of goods or services
Inflation-free interest rate (i)
represents the earning power if money with the effect of inflation removed
Inflated interest rate (if)
represents the rate of interest (earning power of money) with inflation considered
Dollars in period t1 $ t 2
$t1
Inflation t1t 2
Today’s dollar $ t 2
$t 1
1 f n
10-5 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Present Worth Calculation using Today’s Dollars
An item that cost $ 1,000 today is subjected to 10% rate of
inflation and 8% of interest
(1) (2) (3) (4) = (3)/(1+f)n (5) = (4)(P/F, i, n)
EOY Cost increase Future cost Future cost in Present worth
due to in then today’s dollar
inflation dollars
0 1,000 1,000 1,000
1 100 1,100 1,000 925
2 110 1,210 1,000 857.3
3 121 1,331 1,000 793.8