Real values are stated in _______________ dollars.
commodity
constant
foreign
future
constant
What does your text say?
Yes, constant dollars.
Real values are stated in constant dollars.
To understand what "constant dollars" mean, we need to understand the concept of inflation. Inflation is the general increase in prices of goods and services over time, which reduces the purchasing power of a currency. When we express values in constant dollars, we take inflation into account and adjust the values to reflect the purchasing power of the currency in a specific base year.
To determine the constant dollars value, we need to follow these steps:
1. Select a base year: The base year acts as a reference point to compare the values over time. It is commonly chosen as a year where there is a stable and well-known price level.
2. Calculate the inflation rate: Next, we need to determine the inflation rate for each year by comparing the average price level of goods and services in that year to the average price level in the base year. This can be done using an inflation index such as the Consumer Price Index (CPI).
3. Apply the inflation adjustment: Once we have the inflation rate for each year, we can adjust the values to constant dollars by dividing the nominal value (the value expressed in current dollars) by the inflation rate.
By expressing values in constant dollars, we can compare them accurately over time, eliminating the influence of inflation. This is especially useful when analyzing economic data, such as GDP or income, where it's essential to account for changes in purchasing power.