If a person makes $30,000 in 2004 and the inflation rate is 4% annually, how much is this salary worth in the year 2008 (in terms of 2004 dollars)?
To calculate the value of a salary in a different year, adjusting for inflation, you need to consider the cumulative effect of inflation over the years. Here's how you can calculate the value of a $30,000 salary in 2004 in terms of 2004 dollars in the year 2008, considering an annual inflation rate of 4%.
Step 1: Calculate the cumulative inflation rate from 2004 to 2008.
Since the inflation rate is 4% annually, the cumulative inflation rate over four years would be 1.04^4 (1.04 raised to the power of 4 because there are four years between 2004 and 2008).
1.04^4 = 1.16985984
The cumulative inflation rate from 2004 to 2008 is approximately 1.1699.
Step 2: Divide the salary in 2004 by the cumulative inflation rate to get the equivalent salary in 2008 (in terms of 2004 dollars).
Salary in 2008 = Salary in 2004 / Cumulative inflation rate
Salary in 2008 = $30,000 / 1.1699
Using a calculator, the equivalent salary in 2008 (in terms of 2004 dollars) is approximately $25,648.85.
Therefore, a salary of $30,000 in 2004 would be worth approximately $25,648.85 in terms of 2004 dollars in the year 2008.