Understanding What A Dollar Is Worth

Economists track economic data in order to measure the growth of an economy. Logistically, it is difficult to tally this growth because concepts are interpreted and applied both subjectively and qualitatively. Subjectively because business and economists look for different paths to the same measurement and often qualify their data according to their own needs. It is statistically easier to provide an algorithm to quantify data for a specific dollar amount of sales than it is to try count how many of “x” amount of heterogeneous products have been sold for any given year. Herein lies the problem. Data tracked in currency over time becomes inaccurate as a tool of measure because the value of that currency fluctuates due to inflation or deflation.

  • inflation: a progressive increase in the price of goods and services; money becomes less valuable.

  • deflation: a progressive decrease in price of goods and services; money becomes more valuable than those goods and services.

The Consumer Price Index (CPI) measures the average change of the value of goods and services over time in order to understand and better quantify the dollar value of, for instance, a gallon of gasoline, which has risen steadily through the years. If that gallon of gasoline was bought for 50 cents in 1971 and for $2.69 in 2009, the data suggests that the gasoline's value simply rose $2.19 in 38 years. This data would be in error, as it is not adjusted for inflation or deflation. Finding the real value of that gasoline over time means finding out how much the value of a dollar was worth in 1971 as compared to 2009. The question is: has that gasoline increased its price faster or slower than most other goods and services?

In order to calculate this manually, you would find the CPI for 1971 and for 2009 in order to convert those 1971 dollars into 2009 dollars adjusted for inflation. The Bureau of Labor Statistics releases that data monthly.

  • CPI and Inflation Rates: Find the annual average (CPI) and annual percent change (rate of inflation) using this table.

To find the real value of gasoline from 1971 to 2009:

  • Find the CPI for 1971: 40.5

  • Find the CPI for 2009: 214.5

Plug those values into the following formula:

  • 2009 Price = 1971 Price x (2009 CPI / 1971 CPI)

  • $2.65* = $0.50 x (214.5/40.5)

*rounded up

What does this calculation mean? It means that gasoline has increased in price faster than most other goods and services or that $0.50 in 1971 has the same buying power as $2.65 in 2009.

What would that price of gasoline purchased in 1971 be worth in 2009? Simply reverse the positions of the pricing using the same CPI values:

  • 1971 Price = 2009 Price x (1971 CPI / 2009 CPI)

  • $0.51* = $2.69 x (40.5 / 214.50)

 *rounded up

  • $2.69 in 2009 has the same buying power as $0.51 did in 1971.

If you prefer, you can get the same result, faster, using an inflation calculator. As you can see by this illustration, the value of your dollar is intertwined with the consumer price index, which is further intertwined with the amounts of goods and services purchased during any given year. To put it simply, big business and stocks are not the only factor in determining how much bang for your buck you get over time. The power ultimately lies in the hands and the pocketbooks of the consumer.

  • Inflation Calculator: Just plug in the amount for a certain year, pick the next year, and see what your money would be worth.

  • Inflation and Cost of Living Calculators: The many applets and calculators include cost of living, salary comparison, calculating the worth of financial transactions, plus an extensive listing of price index calculators including the employment cost index, gross domestic product, and international price index. Very extensive web site in an easy to follow format, this site has everything you need in one place.

  • Consumer Price Index: An overview of inflation, what the consumer price index is and how to use it to find how much your dollar is worth. Then test your skills with the problems at the end of the page.

  • Browsing the CPI: Current news, announcements, databases, and tables include all the latest data sets for the consumer price index.

  • Real Dollars: Defines current and constant dollars in order to compare income over a set period of time.

  • What is a Dollar?: Monograph presenting a historical analysis of the dollar and monetary policy.

  • Historic Food Prices: Timeline includes relevant links and a Food CPI and Price Outlook, as well as a discussion of that factors increase commodity food prices.

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