Posted:
OMG!! That was too much for me 🤪Adjusted for inflation means adjusted for price level change.
Let's understand what it meansSuppose an economy only has 2 goods (petrol and diesel). In the year 2000, suppose the price of both the goods be Rs 10 per liter. If you are able to sale 10 liters of each then the maximum amount you can earn is 10*10+10*10=200, i.e. Rs. 200 for 20 liters of petroleum.Now, take the year 2015, where the prices have risen to Rs 50 each. In this case the revenue you will earn is 2*50*10=1000, i.e. Rs. 1000 for the same 20 liters of petroleum products. However, if you consume only 4 liters of each then you will have the same revenue as 2000.So, what has changed in the past 15 years in our story. Taking the supply and quality constant, we see that the prices has risen to a great extent.Now, to see the real extent of growth( i.e. How much more consumption is done), we will have to look for real changes in the level of consumption by dividing the 2000 price level.By doing it, we see that in the year 2015 we when adjusted for Inflation the revenue made is 1000/10 =100, revenue has decreased from the past.So, basically Infaltionary adjustment equals the price level in both the periods and gives us an actual picture of growth in real terms. (in terms of quantity)
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