Exchange rate 4 Flashcards
The critical issue for the analyst is to construct a projection of nominal prices that are consistent with X through time and the projection of changes in real prices.
assumed pattern of inflation rates
The projection of the future path of real prices is of particular importance if the price of one
or more input or output is
significantly above or below its normal level or trend.
Historical data for nominal prices are relatively X, but forecasting nominal prices in a consistent manner is a Y
Easy to obtain,
notoriously difficult task
The nominal price of an item is the outcome of two sets of economic forces:
macroeconomic forces that determine the general price level or inflation, and the forces of demand and supply for the item which causes its price to move relative to other goods and services in the marketplace
In order to construct a cash flow forecasts in nominal prices, we must take into
both real prices and the general price level consideration the movement of
The weights established at
that time will rarely change
Instead of calculating the price level for the entire economy, a price level may be created for a certain subset of prices such as
construction materials or consumer goods.
The price index simply
normalizes the price level so that in the base period the index is equal to one
Inflation is much more difficult to
forecast than the changes in real prices,
The supply of money, in turn, is often determined by the
size of the public sector deficit and how it is financed
inflation is inevitably the end result.
If governments finance their deficit by
borrowing heavily from the Central Bank,
A common mistake of project evaluators is to assume that many of the prices of inputs and outputs for a project are
rising relative to the rate of inflation. This is
highly unlikely
To forecast the movement of the real price of a good or service, we need to consider such items as the anticipated change
in the demand for the item over time, the likely supply response, and the forces which are going to affect its cost of production.
The use of constant prices simplifies the construction of a cash flow profile of a project, but it also eliminates
from the analysis
a large part of the financial and economic information that can affect the future performance of the project
It should be noted that real prices are sometimes referred to
constant prices
