Constant Dollar

DEFINITION of 'Constant Dollar'

An adjusted value of currency used to compare dollar values from one period to another. Due to inflation, the purchasing power of the dollar changes over time, so in order to compare dollar values from one year to another, they need to be converted from nominal (current) dollar values to constant dollar values. Constant dollar value may also be referred to as real dollar value.

Constant dollar calculation:

Formula for constant dollar

BREAKING DOWN 'Constant Dollar'

The constant dollar is often used by companies to compare their recent performance to past performance. Governments also use the constant dollar to track changes in economic indicators, such as wages or GDP. Any kind of financial data represented in dollar terms can be converted into constant dollars by using the consumer price index (CPI) from the relevant years.

For example, constant dollars can be used to calculate what $20,000 earned in 1995 would be equal to in 2005. The CPIs for the two years are 152.4 and 195.3, respectively. The value of $20,000 in 1995 would be equal to $25,629.92 in 2005. This is calculated as $20,000 x (195.3/152.4). The calculation can also be done backwards by reversing the numerator and denominator. Doing so reveals that $20,000 in 2005 was equivalent to only $15,606.76 in 1995.

Individuals can also use constant dollars to measure the true appreciation of their investments. For example, suppose Eric bought a house in 1992 for $200,000 and sold it in 2012 for $230,000. After paying his real estate agent a 6% commission, he's left with $216,200. Looking at the nominal dollar figures, it appears that Eric has made $16,200. But what happens when we adjust the $200,000 purchase price to 2012 dollars? By using a CPI inflation calculator, we learn that the purchase price of $200,000 in 1992 is the equivalent of $327,290 in 2012. By comparing the constant dollar figures, we discover that Eric has essentially lost $111,090 on the sale of his home.

RELATED TERMS
  1. Cost-of-Living Adjustment - COLA

    An adjustment made to Social Security and Supplemental Security ...
  2. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Chain-Weighted CPI

    An alternative measurement for the Consumer Price Index (CPI) ...
  5. Real Value

    Nominal value adjusted for inflation. Real value is obtained ...
  6. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
Related Articles
  1. Economics

    Understanding Interest Rates: Nominal, Real And Effective

    Interest rates can be broken down into several subcategories that incorporate various factors such as inflation. Smart investors know to look beyond the nominal or coupon rate of a bond or loan ...
  2. Investing Basics

    How To Profit From Inflation

    Inflation - defined as a sustained increase in the price of goods and services - seems to be inevitable. While rising prices are bad news for consumers, as it takes an ever-increasing amount ...
  3. Investing Basics

    Inflation's Impact On Stock Returns

    When stocks are divided into growth and value categories, the evidence is clear that value stocks perform better in periods of high inflation, and growth stocks perform better during periods ...
  4. Forex Education

    Predict Inflation With The Producer Price Index

    Find out how the PPI can be used to gauge the overall health of the economy.
  5. Economics

    A Primer On Inflation

    Inflation has a negative connotation, but is it all bad or does it offer some tangible benefits?
  6. Options & Futures

    The Consumer Price Index: A Friend To Investors

    As a measure of inflation, this index can help you make key financial decisions.
  7. Bonds & Fixed Income

    Curbing The Effects Of Inflation

    Your investments suffer when general price levels rise. Learn how you can control the damage with IPSs.
  8. Economics

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  9. Economics

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  10. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
RELATED FAQS
  1. What is inflation and how should it affect my investing?

    Inflation, an economic concept, is an economy-wide sustained trend of increasing prices from one year to the next. The rate ... Read Full Answer >>
  2. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  3. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  4. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  5. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  6. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center