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What are the major methods for adjusting financial statements for inflation?
Current Cost: assets restated to market value for the year of the statement, $ value of assets change over time
Constant Dollar: reflect year to year changes in prices, value of dollar changes over time
Current Cost/constant dollar: Assets restated to market value at the time of each statement, then adjusted to reflect year to year price changes.
Give examples of steps managers can take to minimize losses during inflation.
- Managers can:
- 1. adjust output prices as input price increase
- 2. shift cash to physical assets
- 3. Maintain more liquid liabilities than liquid assets
What are the major measures of inflation? Give an example of how each is used.
- Consumer Price Index-Urban (CPI-U) measures changes in prices in the typical bundle of goods purchased by urban consumers.
- Ex. used in wage contracts to adjust wages for inflation.
Implicit Price deflator is current GNP divided by last year’s GNP
Ex. reflects overall changes of prices in the economy
The Wholesale Price deflator is changes in the prices producers pay for inputs
Ex. provides advance warning of likely changes in the CPI
What are the major measures of inflation in health care?
Medical Price Index is a component of the CPI, weakness is that it tracks "charges",
CMS computes "market basket" indices for hospitals, nursing homes, and home health agencies, (major metropolitan, urban, and rural)
Medicare Economic Index, is a blend of other indices
An investor purchases a one year bond with a nominal rate of return of 8%. During the year inflation is 12%. How much will the investor's purchasing power change?
Purchasing Power = 1.08/1.12=.9643, a negative real rate of return
Explain the difference between increases in expenditure and inflation by defining three components of changes in expenditures.
Inflation-the change in the price of particular goods.
Intensity - cost increases but with the quality. More resources may be used for each unit of service
More units of service
Explain the differences between a change in cost, a change in rates paid by payors, a change in premium rates, a change in expenditures and a change in cost to consumers
fees paid by insurers change at different rates than provider’s cost
insurers may not change their premiums to employers at the same rate that their costs change
expenditures do not change at the same rate as premiums
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