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    luraetheangel's Avatar
    luraetheangel Posts: 1, Reputation: 1
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    #1

    Jul 28, 2007, 05:20 AM
    Geometric Mean Rate
    A recent article suggested that if you earn $25,000 a year today and the inflation rate continues at 3% per year, you will need to make $33,598 in 10 years to have the same buying power. You will need to make $44,771 in the inflation rate jumped to 6%. Confirm the statements are accurate by finding the geometric mean rate of increase.

    Not sure where to put the numbers in the formula and want to confirm the formula. Since it is between two periods -

    GM=n/sqroot value at the end of the period divided by value at the beg of the period.
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    Jul 28, 2007, 03:02 PM
    25,000 x 1.03^10 = 33,598
    25,000 x 1.06^10 = 44,771

    Therefore, the statements are correct.
    ebaines's Avatar
    ebaines Posts: 12,131, Reputation: 1307
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    #3

    Jul 31, 2007, 07:39 AM
    Quote Originally Posted by luraetheangel
    GM=n/sqroot value at the end of the period divided by value at the beg of the period.
    Where did you get your formula from? It's not correct.

    Given:




    the formula for calculating the geometric mean (also known as the exponential growth rate) is:


    Using your first example you find that R = (33598/25000)^1/10 = 1.03, which confirms that it corresponds to a 3% growth rate per year.
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