Question

Please use excel and colored cells for input data and a different colored cell for the answer. No hidden numbers in the formulas! If a number is used, it should be visible if we print out the spreadsheet. Put each answer in a sheet labeled with the problem number, like “Problem 1”

1. Suppose natural gas experiences a 1.8% increase per year in real terms over the foreseeable future. The cost of 1,000 cubic feet of natural gas is now $7.50.
   1. What will be the cost in real terms of 1,000 cubic feet of natural gas in 16 years?
   2. If the general price inflation rate (e.g., the CPI) for the next 16 years is expected to average 3.2% per year, what will a 1,000 cubic feet of natural gas cost in actual dollars 16 years from now?

Answer 1

Solution

In the given question current price = $7.5

The prices will increase by 1.8% every year

And inflation = 3.2 %

So price in next year will be calculated by Current year price*1.018

Also price in real dollar terms will be discounted value using inflation as interest rate

Year	Increment	Actual dollar=Previous year price*1.018	Pricing in Real dollar=Actual dollar price/(1+.032%)^n
1	1.80%	7.64	7.40
2	1.80%	7.77	7.30
3	1.80%	7.91	7.20
4	1.80%	8.05	7.10
5	1.80%	8.20	7.00
6	1.80%	8.35	6.91
7	1.80%	8.50	6.82
8	1.80%	8.65	6.72
9	1.80%	8.81	6.63
10	1.80%	8.96	6.54
11	1.80%	9.13	6.45
12	1.80%	9.29	6.37
13	1.80%	9.46	6.28
14	1.80%	9.63	6.19
15	1.80%	9.80	6.11
16	1.80%	9.98	6.03

in real dollars 16th year value = 6.03Therefore price in actual dollar in 16th year is 9.98