Kelompok 5 Binus University Class LB53 : Adhitiya Pranoto 2201800394 Alam Afrizal 2201802424 Agra Fausta Danasmara 2201790626 Dionisius Benifulbert Dani 2201844830 Reyhan Yafi Azlia 2201789006 Reyhan Chandra Basuki 2201773153

1. Deflating a
Series by
Price
Indexes
Kelompok 5 :
• Adhitiya Pranoto 2201800394
• Alam Afrizal 2201802424
• Agra Fausta Danasmara
2201790626
• Dionisius Benifulbert Dani
2201844830
• Reyhan Yafi Azlia 2201789006

2. JensMartensson
2
What is Deflating a
Series by Price
Indexes ?
• In order to correctly interpret business activity
over time when it is expressed in dollar amounts,
we must adjust the data for the price-increase
effect
• Removing the price-increase effect from a time
series is called Deflating The Series.

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3
WHY MUST TO DEFLATE A DOLLAR FIGURE ?
• Price inflation often distorts the dollar figures we use. Revenue totals grow faster when inflation is high,
but the revenue's power to purchase goods and services may not be growing. Expenditure totals grow
faster with inflation, too, but may not represent increases in services delivered to citizens. Inflation causes
wages to rise, but since prices also are rising, higher wages may not purchase any more bread or gasoline
or refrigerators.
• So, Because of that To eliminate the influence of inflation on dollar figures, we can "deflate" them
with a price index. The resulting figures are sometimes called "real", because they represent quantities of
goods and services, rather than "nominal" dollar amounts
• Deflating actual hourly wages results in real wages or the purchasing power of wages.

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Notes:
Sometimes the deflated dollar amounts are said to be "in 1987 dollars" or
"constant dollars," meaning they represent what the figure would have been
had prices been constant at 1987 levels. Sometimes the deflated figures are
described simply as "adjusted for inflation." Any of these descriptions will
do, but "real figures in constant 1987 dollars adjusted for inflation" is overkill.

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5
Several Useful Price Index
• The Consumer Price Index (CPI) This is the most widely publicized price index. The "market
basket" of the CPI is determined by a survey of the expenditures of consumers, and includes
the prices of products which consumers typically purchase.
• The Gross Domestic Product Price Deflator The GDP deflator is the broadest measure of price
change available, since it averages prices of all goods and services included in the Gross Domestic
Product.
• The Producer Price Index (PPI). It used to be known as the Wholesale Price Index, but the name was
changed several years ago to better reflect what is included in the index. The PPI measures price
received by domestic producers of commodities in all stages of production

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Price Index Component
• CPI Component Indexes . CPI include indexes for parts of the CPI market basket, such as food and
beverages, housing, fuel and utilities, apparel and upkeep, transportation, medical care, entertainment,
and many others. The base years for each are 1982-84. Also available are special indexes, such as
"All items less food," "All items less medical care," and so forth.
• GDP Deflator Component Indexes Divided into durable and non-durable consumer goods,
structures and producers' durable equipment, imports and exports, and government purchases. Of
special interest is the State and Local Purchases Deflator, which shows price changes of goods and
services purchased by state and local governments. The state and local index is further divided into
durable goods, non-durable goods, compensation of employees, other services, and structures.

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Example 1
1. McNeer Cleaners, with 46 branch locations, has had the total sales revenues shown
on the next slide for the last five years. Deflate the sales revenue figures on the basis of
1982-1984 constant dollars. Is the increase in sales due entirely to the price-increase
effect?

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Answer 1
2011 11,690 224.9
2010 10,724 218.1
2009 9,830 214.5
2008 9,062 215.3
2007 8,446 207.3
Year Total Sales ($1000) CPI
CPI is computed with a 1982-1984 base
index of 100

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After adjusting, revenue is still increasing at an
average rate of 6.3% per year.
2011 (11,690/224.9)(100) = 5,198 +5.7
2010 (10,724/218.1)(100) = 4,917 +7.3
2009 (9,830/214.5)(100) = 4,583 +8.9
2008 (9,062/215.3)(100) = 4,209 +3.3
2007 (8,446/207.3)(100) = 4,074
Year
Deflated
Sales ($1000)
Annual
Change (%)
DEFLATED SERIES OF TOTAL SALES

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RealSalesRevenue($1000s)
2007 2008 2009 2010 2011
4500
4750
5000
5250
5500
4250
Year
4074
4209
4917
5198
4583
Graphics

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Example 2
2. Registered nurses in 2007 made an average hourly wage pf $30.04. In 2011,
their hourly wage had risen to $33.23. Given that the CPI for 2007 was 207.3
and the 2011 CPI was 224.9. Answer the following
• Give the real wage for registered nurses for 2007 and 2011 by deflating the
hourly wage rate
• What is the percentage change in the actual hourly wage for registered
nurses from 2007 to 2011
• For registered nurses, what was the percentage change in real wages from
2007 to 2011?

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Answer2A. Deflated 2007 wages = $30.04
--------- (100) = $14.49
$207.3
Deflated 2011 wages = $33.23
----------(100) = $14.48
$224.9
2B. $33.23
--------(100) = 1.11 , The percentage increase in actual wages IS 11%
$ 30.04
2C. 14.78
-------(100) = 1.02 , The percentage increase in real wages is 2 %
14.49

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Example 3
3. What does the deflated series of wages tell us about the real wages or
purchasing power of Teacher during the 2019-2017 period? Deflate the Wages
on the basis of 1982-1984 constant dollars.

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Answer 3HOURLY WAGES OF TEACHER AND CONSUMER PRICE INDEX 2009 to 2017
Year Hourly Wages $ CPI
2009 20 214.5
2010 22 218.1
2011 25 224.9
2012 30 229.5
2013 34 232.9
2014 36 236.7
2015 40 237.1
2016 42 240.1
2017 48 245.1

15. JensMartensson
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Deflated Series of Hourly Wages For teacher 2009-
2017
Year Deflated Hourly Wage Annual Change
2009 (20/214.5)(100)= 9.32
2010 (22/218.1)(100)= 10.08 +8.1 %
2011 (25/224.9)(100)= 11.12 +10.3 %
2012 (30/229.5)(100)= 13.07 +17.5 %
2013 (34/232.9)(100)= 14.6 +11.7 %
2014 (36/236.7)(100)= 15.2 +4.1 %
2015 (40/237.1)(100)= 16.87 +10.9 %
2016 (42/240.1)(100)= 17.49 +3.6 %
2017 (48/245.1)(100)= 19.58 +11.9 %
After adjusting, revenue is still increasing at an
average rate of 9.76 % per year.

16. Sumber Pustaka
• Special Thanks To Jens
Martensson for this PowerPoint
Template
• https://www.agecon.purdue.edu
/crd/localgov/essays/priceind.ht
m
• https://www.dallasfed.org/resea
rch/basics/nominal.aspx
• https://www.usinflationcalculato
r.com/inflation/consumer-price-
index-and-annual-percent-
changes-from-1913-to-2008/
• Loucks,John.2014.Statistics for
Business and Economics 12e
Chapter 20.Canada
Thank
You