Constant Dollar

AAA

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. Inflation

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

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

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

    A measure that examines the weighted average of prices of a basket ...
  5. Purchasing Power

    1. The value of a currency expressed in terms of the amount of ...
  6. Nominal Value

    The stated value of an issued security. Nominal value in economics ...
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

    Explaining the Participation Rate

    The participation rate is the percentage of civilians who are either employed or unemployed and looking for a job.
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 are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  3. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  4. Are Social Security benefits adjusted for inflation?

    Social Security benefits are adjusted for inflation. This adjustment is known as the cost of living adjustment (COLA). For ... Read Full Answer >>
  5. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  6. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!