First a base year must be established. For the United States we use the years of 1982-1984 as our base year giving it the Consumper Price Index number of 100. this is calculated by finding the price of a market basket in a given year, divide by the base year (in the case of the base year it would be the same number) and then adding 100. This creates your CPI for any given year.
Value of Market Basket in a Given Year / Value of Market Basket in the Base Year * 100 = CPI
Once you calculate the CPI, then you can find the price change.
Price Change = (Change in CPI / Begining CPI) * 100
In other words, to calculate the inflation percentage from any two years a simple formula to determine slope can be used.
(CPI year 2 - CPI year 1)/(CPI year 1) * 100 = Inflation percentage
After finding the CPI and Inflation percentage then you can use the CPI to convert Nominal GDP to Real GDP in order to compare different years GDP on an equivalent dollar (i.e. - adjusted for inflation) such as the value of a dollar in 1996 of goods sold in 1986.
(Nominal GDP/CPI)*100 = Real GDP
Hope this was a helpful reminder and refresher. Took me a while to type it so enjoy!!!!!
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