Question I The following data indicate the price indexes of a lumber product dur

ID: 1156493 • Letter: Q

Question

Question I The following data indicate the price indexes of a lumber product during the last 5 years (base period 1992 100): Period 1994 1995 1996 1997 1998 1999 Index 143.8 134.5 129.3 147.1 150.6 a) Assuming that the base period (price index - 100) is reset to the year 1994 period, compute the new lumber price index for each vear from 1994 to 1998 b) Calculate the average annual inflation rate over the 1994 to 1998 period c) If the past trend is expected to continue, how would you estimate the lumber product at time period 1999? How confident are you in this projection?

Explanation / Answer

PART-1)

Period

Index

Index(1994 = 100)

Working

1994

143.8

100

100*143.8/143.8

1995

134.5

93.5

100*134.5/143.8

1996

129.3

89.9

100*129.3/143.8

1997

147.1

102.3

100*147.1/143.8

1998

150.6

104.7

100*150.6/143.8

PART-2) f = (150.6/143.8)^1/4 - 1 = 1.1618%

PART-3)

Year- 199 : Price of lumber = ($143.8) (1 + 0.011618)^5 = $152.3

The above computed projection may not be very accurate because in the past few years the annual trend has been erratic. Special forecasting techniques can be utilized for extrapolating more accurately when the series is not smooth.