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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 to constant dollar values.
Calculated as:
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Investopedia explains 'Constant Dollar'
The constant dollar is often used by companies to compare the performance of recent years to past performance. Governments also use the constant dollar to track changes in economic indicators, such as wages over time. Any kind of financial data that is represented in dollar terms can be converted into constant dollars by using the Consumer Price Indexes of various 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 ($20,000*(195.3/152.4)). The calculation can be done backwards, comparing $20,000 in 2005 with 1995, by reversing the numerator and denominator in the equation.
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