Constant Dollar

Filed Under: ,
Dictionary Says

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

Investopedia Says

Investopedia explains '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.

comments powered by Disqus
Hot Definitions
  1. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  2. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  3. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  4. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  5. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
  6. Momentum Investing

    An investment strategy that aims to capitalize on the continuance of existing trends in the market. The momentum investor believes that large increases in the price of a security will be followed by additional gains and vice versa for declining values.
Trading Center