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Current dollars (also known as "nominal dollars") are dollars in the year they were actually received or paid, unadjusted for price changes. For many years the US economy has experienced inflation, so amounts expressed in current dollars misrepresent their actual purchasing power. For example, someone earning $20,000 in 1955 in current dollars – the dollars actually paid that year – would appear to be lower middle-class at best. But despite the low amount in current dollars, he or she would have been in the upper middle-class.
To make valid comparisons of economic activity and prices over time, instead of current dollars economists use constant dollars, which adjusts current dollars for the impact of inflation. Since the basket of goods and services used to measure inflation changes over time – there were no personal computers in 1955 – constant dollars have measurement problems like current dollars. But overall they give a much more accurate picture of economic activity than current dollars. |
