Table 7 shows the annual sales figures for Acme Trading. Calculare the 'real' sales at 1994 prices rounded to the nearest £ thousand and complete the following statement:
Acme's sales are:
A) just keeping up with inflation
B) falling and not keeping up with inflation
C) falling but staying ahead of inflation
D) growing but not keeping up with inflation
E) growing and stayin ahead of inflation
The real sales (adjusted for inflation) for a given year, are computed
like this:
1995: 828 / (149.1 / 144.1) = ...
1996: 848 / (152.7 / 144.1) =
1997: 874 / (157.5 / 144.1) =
Then you compare the result of each year with the 1994 sales number to
see if they are higher, the same or lower.
Explanation: for the 1995 year, 149.1/144.1 = 1.035 is the inflation
rate, actually 1+inflation percentage which is 3.5 percent. So by
diving the sales by this ratio you bring back the 1995 sales into 1994
dollars, so you can make the comparison on an inflated adjusted basis.
The purpose of price indexes is exactly to allow the comparison of prices adjusted for inflation over the years, taking one particular year as the basis (1987, in this particular case of yours). So it is useless to calculate the inflation year rate from one year to the other as it is already implied in the index numbers, making the comparison of numbers originated in any two years quite an easy task, regardless of how far apart in time they may be.
Example:
Base year sales = 2,000; Index number = 100
Sales of year X = 3,000; Index number = 150
Inflation adjusted sales of year X = 3,000 x 100/150 = 2,000
Sales just kept up with inflation.
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I took RPI as “something”(?) meaning the same as “inflation index number” but now I see from your comments that I misinterpreted it. From the index numbers given, you cannot conclude any thing at all, as they simply refer to the increase rate of sales since 1987 (base 100) at £ 555. Sales in 1994 = 144.1/100 x 555 = £ 800; …; Sales in 1997 = 157.5/100 x 555 = £ 874. I worked out the numbers in reverse order and, as I found sales to be approximately £ 555 every year, I concluded logically that sales just kept up with inflation.
Inflation rates should be given in order to compare the increase in sales from one year to the next. Part would be due to inflation and part to real “good work”. Therefore, it is my belief that the question is incomplete (inflation rates or their derived index numbers are missing).
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Please see attached an example of what I mean. You can either adjust sales (or costs) of each year to conform year 1 prices or right the opposite: today´s prices. Today´s prices adjustment of inflation is useful if you want to forecast sales (or costs) a few years ahead.
In the example given, sales are growing and staying ahead of inflation.
I hope this issue is more clear now.
Regards
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