Constant Dollar

What is a 'Constant Dollar'

A constant dollar is 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. Constant Dollar Accounting

    A method of accounting that measures financial statements in ...
  2. Constant Currencies

    An exchange rate that eliminates the effects of exchange rate ...
  3. Loan Constant

    An interest factor used to calculate the debt service of a loan. ...
  4. Mortgage Constant

    A ratio between the annual amount of debt servicing to the total ...
  5. Dollar Bull

    An investor or speculator who is optimistic about the outlook ...
  6. Constant Maturity

    An adjustment for equivalent maturity, used by the Federal Reserve ...
Related Articles
  1. Trading

    Play Foreign Currencies Against The U.S. Dollar And Win

    Don't panic when the dollar drops. Learn to exploit the greenback's decline and profit from it.
  2. Investing

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  3. Trading

    The Pros & Cons Of A Strong Dollar

    As the U.S. economy has emerged from the Great Recession, the strength of the U.S. dollar has also improved.
  4. Trading

    Profiting From A Weak U.S. Dollar

    Learn how to allocate your investments when the U.S. dollar is down.
  5. Investing

    What Does Nominal Mean?

    Nominal refers to an unadjusted value or change in value.
  6. Trading

    What Do Weak Dollar And Strong Dollar Mean?

    A weak dollar and a strong dollar describe the strength of the U.S. dollar in comparison to other currencies in the foreign exchange market.
  7. Trading

    5 Reports That Affect The U.S. Dollar

    These five reports provide short- and long-term insight into the valuation of the U.S. dollar.
  8. Trading

    3 Factors That Drive The U.S. Dollar

    We look at three important factors that affect U.S. dollar value, and how to determine when it's the right time to buy currency.
  9. Trading

    The U.S. Dollar's Unofficial Status as World Currency

    Discover how and why the U.S. dollar emerged as official currency in many foreign countries.
  10. Investing

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
RELATED FAQS
  1. A formula timing plan which consists of periodic purchases of a fixed dollar amount ...

    a. Dollar cost averaging b. Share averagingc. Constant dollar pland. Constant ratio plan Answer: A"A" is correct because ... Read Answer >>
  2. What types of companies benefit from reporting results utilizing constant currencies ...

    Understand constant currency figures, and explore some of the reasons why a company is likely to benefit from reporting using ... Read Answer >>
  3. If markets give information on value through price, how can nominal values be out ...

    Learn more about nominal values, real values and how these two measurements differ. Explore the impact of inflation and deflation ... Read Answer >>
  4. What do the terms weak dollar and strong dollar mean?

    The two terms, weak dollar and strong dollar, are generalizations used in the foreign exchange market to describe the relative ... Read Answer >>
  5. Is the nominal value of a security ever also the real value?

    Learn more about nominal values and real values. Find out how these market values change and if they may ever converge for ... Read Answer >>
  6. How can you calculate the difference between nominal value and real value of stock ...

    Explore the impact of real value and nominal value on stock trading. Find out how these values are assigned and what causes ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center