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Constant dollars are dollars that have been adjusted for the impact of inflation, as opposed to current dollars, which are actual dollars paid or received. Constant dollars can be computed by the formula Constant Dollars = Current Dollars x (Previous Consumer Price Index/Current Consumer Price Index), where the Consumer Price Index (CPI) measures the level of inflation. Here's an easy (if unrealistic) example of constant dollars: Suppose your boss gives you a bonus of $1,250 this year compared with $1,000 last year; the CPI this year was 125, while last year it was 100. In constant dollars, you received the same $1,000 each year, since current dollars of $1,250 X 0.80 (i.e., 100/125) equals constant dollars of $1,000. Since the US economy continually experiences inflation, constant dollars provide useful comparisons of amounts paid and received in different time periods. Indeed, the use of current dollars instead of constant dollars is often the hallmark of a dishonest economic argument. A movie star who was "only" making $50,000 in 1937 in current dollars was actually making well over $500,000 in constant dollars. |
