I would like to ask a question, which has been already asked, however I dind´t fully understand the answer and nobody replied to my edit question..maybe you can give me a arithmetic example for one year.
I have a time series variable from 1960-2011 which is coal rents measured in 2009 US Dollar. I would like to set this variable in relation (ratio) to another variable which is PPP Converted GDP Per Capita (Chain Series), at 2005 constant prices.
$\frac{\rm coal \;rent}{\rm GDP(ppp)}$
I would like to run some regressions with this variable as my independent variable. However I´m not sure whether I have to account for inflation when doing the ratio of $\frac{\rm coal \;rent}{\rm GDP(ppp)}$.....I dont have much economics backround maybe some of you are able to give me a theoretical as well as a practical hint....
Ross already suggested:
Since your GDP data is adjusted for inflation, it seems more logical to have your coal rents in constant dollars. To do so, divide the coal rents in each year by the ratio of that year's inflation measure to the measure in the base year (presumably 2005)
However I dont fully understand, particularly the part 1."divide the coal rents in each year by the RATIO of that year's inflation measure". 2. Shall I use the US Inflation rate since 1960?
Can somebody give me an arithmetic example for one year, for instance?
Thx alot
You mention coal rents are measured in 2009 US Dollar. Then they are already inflation adjusted.
Most likely you know this but I'll state anyway: Inflation adjustment is needed when we are comparing dollars in one year with dollars in another year. The idea is that people care not about dollars but about what they can buy with those dollars. If a person uses dollars to buy burgers and a burger costs 1 dollar in year 2000 but \$1.1 in year 2001, then a dollar in year 2001 is worth less than a dollar in year 2000. So a dollar in year 2001 is equivalent to 1/1.1 dollars in year 2000.
In practice, inflation adjustment is done using an index of prices rather than price of burgers. See CPI Data. Suppose you want to convert dollar amounts in different years to year 2000 constant dollars. Then divide the dollar amount in year y by the price index in year y and multiply by the price index in year 2000. For example, \$100 in year 2001 would be converted to \$100*177.1/172.2.