Treatment of Price Changes
We give attention to the question of how to deal with changes in price level because it is a much misunderstood and confusing issue. First, we demonstrate the need to adjust for changes in the purchasing power of the dollar.1 Next, we show how to measure changes in the price of a good or service in current dollars and in constant dollars. Finally, we describe two valid approaches for dealing with inflation in an economic evaluation: (1) working in current dollars and removing inflation as part of the discounting operation and (2) working in constant dollars and excluding inflation at the outset.
KeywordsDiscount Rate Cash Flow Price Change Gross National Product Producer Price Index
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