Question

The home where I grew up was purchased by my father for $3,200 in the year 1943. As of the year 2012, its market value was $850,000.

1. Using the concepts of purchasing power, inflation, and price indexes how would you explain this tremendous increase in value?
2. Are there any other possible outside factors besides the above which might also help explain the increase?

Answer 1

(A) the value of home in 1943 is $3200 whereas in 2012 is $850000 is mainly by Inflation. inflation means increase in prices of goods and services over year to year. if inflation increase then the value of money is decreasing and that reduces the purchase power of households.so people want too much money to purchase goods or services. that's why the value of house increased because of purchasing power decrease and inflation increasing. price index is the measurement of value of goods or services which is value currently on the basis of base year.the price index of base year is always 100. for example if inflation increase from 1997 to 2012 then the price index also increase to show how much the value of goods increase and how the inflation increased.this also called time value of money.

(B) there are many other factors who affected to increase in the value of house like Change in government policy, increase in economy growth , increase in expenditure. for example if the government implement fiscal policy and spending money to infrastructure then the circulation of money in economy increase so the value of house is also increased. due to expenditure increase the people always want to sell their house at maximum price so their passion towards house also increase the value of house.