Constant Dollar: Overview, Examples, and Formulas

A constant dollar is an adjusted value of currency that's used to compare dollar values from one period to another. The purchasing power of the dollar changes over time due to inflation so dollar values must be converted from nominal (current) dollar values to constant dollar values to compare dollar values from one year to another. Constant dollar value may also be referred to as real dollar value.

Constant Dollar Calculation

Second-Year Constant Dollar Value = FYDV x CPI2 / CPI1

Where:

FYDV = First-year dollar value

CPI2 = Consumer price index for the second year

CPI1 = Consumer price index for th first year

Basics of Constant Dollars

The constant dollar is often used by companies to compare their recent performance to past performance. Governments 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.

Individuals can also use constant dollars to measure the true appreciation of their investments. When calculated in the same currency, the only time when a constant dollar value would be higher in the past than in the present is when a country has experienced deflation over that period. 

Example of Constant Dollars

Constant dollars can be used to calculate what $20,000 earned in December 2022 would have been equal to in December 2023. The CPIs for the two years were 296.7 and 307.0 respectively.

The value of $20,000 in 2022 would be equal to $20,694.30 in 2023. This is calculated as $20,000 x (307/296.7).

Suppose you bought a house for $200,000 and sold it 20 years later for $230,000. You're left with $216,200 after paying your real estate agent a 6% commission. Looking at the nominal dollar figures, it appears that you've made $16,200 but what happens when we adjust the $200,000 purchase price to current dollars? By using a CPI inflation calculator, we learn that the purchase price of $200,000 is the equivalent of $327,290 after the passage of 20 years.

We discover by comparing the constant dollar figures that you've essentially lost $111,090 on the sale of your home.

The Bottom Line

A constant dollar calculation adjusts the value of a dollar by comparing it between one time and another. It's a critical component in business that's used to measure the value of productivity from one period to another. The government uses this tool to gauge changes in earnings and gross domestic product. It should always be considered by investors to reflect the true value of any gain they might realize.