Chapter 5: Problem 16

How do you convert a series of nominal economic data over time to real terms?

Short Answer

Expert verified

To convert a series of nominal economic data to real terms, follow these steps: (1) obtain the nominal data and corresponding Consumer Price Index (CPI) data from reputable sources, (2) select a base year with its assigned CPI value, (3) calculate CPI ratios for each year by dividing each year's CPI by the base year's CPI, (4) convert nominal data to real data by dividing each year's nominal data by its corresponding CPI ratio, and (5) interpret and analyze the real economic data to gain insights into underlying economic trends and growth patterns, independent of price level changes.

Step by step solution

Obtain nominal economic data and the corresponding CPI data

The first step is to gather data on both the nominal economic variable you wish to convert (e.g. Gross Domestic Product, income, or prices) and the relevant Consumer Price Index (CPI) for your dataset's time period. You can obtain this data from sources such as government statistical agencies or economic databases.

Select a base year for the CPI

Choose a base year to which you will compare the other years in your dataset. This base year will be assigned a CPI value of 100 (or another predetermined value). Typically, the base year is set by the statistical agency that provides the CPI data.

Calculate the CPI ratios for each year

Divide the CPI value for each year in your dataset by the CPI value of the base year. This will give you the CPI ratio for each year. \[ \text{CPI ratio}_{t} = \frac{\text{CPI}_{t}}{\text{CPI}_{\text{base year}}} \] where \(t\) represents each year in your dataset.

Convert nominal data to real data using the CPI ratios

Divide the nominal economic data for each year by their corresponding CPI ratio to obtain the real economic data for that year. \[ \text{Real data}_{t} = \frac{\text{Nominal data}_{t}}{\text{CPI ratio}_{t}} \] Repeat this process for each year's nominal data in your dataset.

Interpret and analyze the real economic data

Now that you have converted the nominal data to real data, you can analyze and compare these values across different years, accounting for the effects of inflation. This will allow you to gain insights into the underlying economic trends and growth patterns, independent of price level changes.