Economic Analysis of Nominal vs. Constant Dollars with Calculations

This assignment delves into the concepts of nominal and constant dollars, crucial for understanding economic data. It begins by defining nominal dollars as values at the time of production, unadjusted for inflation, and constant dollars as inflation-adjusted values, also known as real dollars. The assignment then presents calculations to convert nominal revenue into constant dollars for various years using CPI data, demonstrating how inflation impacts the perceived value of money over time. The analysis includes the use of formulas and tables to illustrate these conversions, along with line graphs that visually compare nominal and constant dollar trends. The assignment also highlights the significance of choosing the correct base year when calculating constant dollars, emphasizing the importance of using recent base years for current estimations and policy implications. Finally, the assignment extends the analysis to expenditures, calculating constant dollar values for sign repair expenditures in a city, and justifying the need for additional funding based on these adjusted values. The references section provides sources for the definitions and economic concepts discussed.

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Contents
Question 1.............................................................................................................................................2
Answer 1............................................................................................................................................2
Questions 2............................................................................................................................................3
Answer 2............................................................................................................................................3
Question 3.............................................................................................................................................5
Answer 3............................................................................................................................................5
Question 4.............................................................................................................................................8
Answer 4............................................................................................................................................8
References...........................................................................................................................................10
Appendix.............................................................................................................................................11
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Question 1.
Answer 1.
a. Nominal Dollars: Nominal dollars calculate the value of product or service in terms of
dollar during the time it was actually produced (Federal Reserve Bank of St. Louis,
2007). It does not adjust inflation or deflation in its calculation. Nominal dollar is also
known as Current dollar (Informit, n.d.).
b. Constant Dollars: Constant dollars calculate the value of product or service in terms
of dollar during the time it was actually produced however, at the time of calculation
it considers the effect of inflation or deflation.
As we know the purchasing power of dollars is not constant and it changes as a result
of inflation or deflation. In order to carry out the comparison of dollar value from one
period to another, nominal dollar value is converted to constant dollar value which is
inflation or deflation adjusted (United States Census Bereau, 2019).
Constant dollar value is also termed as Real dollar value (Statistics Canada, 2011).
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Questions 2.
Answer 2.
a and b) Formula Used for calculating Constant Dollars 2012 and 1984:
Table A: Constant Dollar 2012 and 1984 (Refer Appendix for detailed calculation)
Rental
Yea
r Revenue CPI
Constant Dollars-
2012
Constant Dollars-
1984
1984 $13,366.55 103.933 $29,528.77 $13,366.55
1985 $14,564.45 107.6 $31,078.59 $14,068.09
1986 $15,487.57 109.692 $32,418.12 $14,674.45
1987 $16,363.24 113.617 $33,067.81 $14,968.54
1988 $17,161.30 118.275 $33,314.76 $15,080.32
1989 $18,000.50 123.942 $33,346.14 $15,094.53
1990 $18,379.25 130.658 $32,297.67 $14,619.93
1991 $18,768.42 136.167 $31,647.20 $14,325.48
1992 $19,026.90 140.308 $31,136.16 $14,094.16
1993 $20,145.73 144.475 $32,016.20 $14,492.52
1994 $21,099.88 148.225 $32,684.21 $14,794.90
1995 $22,435.85 152.383 $33,805.35 $15,302.40
1996 $23,575.86 156.858 $34,509.63 $15,621.20
1997 $24,924.04 160.525 $35,649.65 $16,137.24
1998 $26,636.09 163.008 $37,518.11 $16,983.02
1999 $28,247.11 166.583 $38,933.44 $17,623.69
2000 $29,829.21 172.192 $39,774.82 $18,004.55
2001 $30,719.85 177.042 $39,840.27 $18,034.17
2002 $30,417.06 179.867 $38,828.02 $17,575.97
2003 $30,927.76 184 $38,593.14 $17,469.65
2004 $33,056.72 188.908 $40,178.05 $18,187.08
2005 $36,661.23 195.267 $43,107.98 $19,513.34
2006 $39,770.85 201.558 $45,304.81 $20,507.76
2007 $41,430.22 207.344 $45,878.08 $20,767.26
2008 $40,823.03 215.254 $43,544.51 $19,710.95
2009 $37,668.88 214.567 $40,308.74 $18,246.23
2010 $36,647.82 218.085 $38,583.52 $17,465.29
2011 $39,649.70 224.935 $40,472.71 $18,320.46
2012 $40,892.75 229.604 $40,892.75 $18,510.59
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Constant Dollars 2012= Nominal Revenue*CPI of 2012/ CPI of Current Year
Constant Dollars 1984= Nominal Revenue*CPI of 1984/ CPI of Current Year

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c)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
$30,000.00
$35,000.00
$40,000.00
$45,000.00
$50,000.00
Revenues in Nominal Dollars and Constant
Dollars (2012 and 1984)
Revenue Constant Dollars-2012 Constant Dollars-1984
Figure A: Line Graph Showing Nominal Dollars, Constant Dollars
d) From Figure A, it is clear that constant dollars are rising in both 1984 and 2012 however
their levels of going up are different. All of the data are not required to be used. Either the
data of constant dollar 2012 or data of constant dollar 1984 can be used to explain that the
rentals have gone up after erasing or removing the impact of inflation.
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Question 3.
Answer 3.
a. Formula Used for calculating Constant Dollars 1995:
Table A: Constant Dollar 1995 (Refer Appendix for detailed calculation)
Rental
Yea
r Revenue CPI
Constant Dollars-
1985
198
4
$13,366.5
5
103.93
3 $19,597.58
198
5
$14,564.4
5 107.6 $20,626.16
198
6
$15,487.5
7
109.69
2 $21,515.17
198
7
$16,363.2
4
113.61
7 $21,946.36
198
8
$17,161.3
0
118.27
5 $22,110.25
198
9
$18,000.5
0
123.94
2 $22,131.08
199
0
$18,379.2
5
130.65
8 $21,435.24
199
1
$18,768.4
2
136.16
7 $21,003.53
199
2
$19,026.9
0
140.30
8 $20,664.37
199
3
$20,145.7
3
144.47
5 $21,248.43
199
4
$21,099.8
8
148.22
5 $21,691.77
199
5
$22,435.8
5
152.38
3 $22,435.85
199
6
$23,575.8
6
156.85
8 $22,903.26
199
7
$24,924.0
4
160.52
5 $23,659.87
199 $26,636.0 163.00 $24,899.93
5
Constant Dollars 1995= Nominal Revenue*CPI of 1995/ CPI of Current Year
Constant Dollars 2012= Nominal Revenue*CPI of 2012/ CPI of Current Year

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8 9 8
199
9
$28,247.1
1
166.58
3 $25,839.25
200
0
$29,829.2
1
172.19
2 $26,397.65
200
1
$30,719.8
5
177.04
2 $26,441.09
200
2
$30,417.0
6
179.86
7 $25,769.28
200
3
$30,927.7
6 184 $25,613.40
200
4
$33,056.7
2
188.90
8 $26,665.27
200
5
$36,661.2
3
195.26
7 $28,609.79
200
6
$39,770.8
5
201.55
8 $30,067.78
200
7
$41,430.2
2
207.34
4 $30,448.25
200
8
$40,823.0
3
215.25
4 $28,899.51
200
9
$37,668.8
8
214.56
7 $26,752.00
201
0
$36,647.8
2
218.08
5 $25,607.01
201
1
$39,649.7
0
224.93
5 $26,860.83
201
2
$40,892.7
5
229.60
4 $27,139.60
b.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
$0.00
$10,000.00
$20,000.00
$30,000.00
$40,000.00
$50,000.00
$60,000.00
$70,000.00
$80,000.00
Nominal Revenue and Constant Dollars-1995
Revenue Constant Dollars-1995
Figure B: Line Graph Showing Nominal Dollars, Constant Dollars
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c. There is a crucial difference which should be indentified at the time of examining
economic statistics. It is significant to see whether inflation has distorted the statistics
given because analysisng statistics without considering the effect of inflation is like
using binoculars to measure the distance of something. It is difficult to measure the
distance of an object unless we know about the strength of binoculars’ lenses. In the
same way, if we do not have the knowledge of inflation level we cannot calculate the
revenue correctly. The statistics’ nominal dollar value means the statistics has been
calculated in terms of actual prices that exist during that time. However, constant
dollar measure the statistics considering the level of inflation that is these statistics are
inflation adjusted. Constatnt dollar is considered to be more appropriate over nominal
dollar (Openstax CNX, n.d.).
Figure B represents two series which are constant and reflects the need for the analyst
to make a single choice. Analyst choose the base year randomly while calculating
constant dollar. However, they do not make their choices randomly or arbitarily.
There are many messages which are backward looking. The aim of such messages is
to narrate a story regarding constant dollars and revenue- related policy implication.
Therefore, where the intention is story telling instead of estimation for the present
year it is better to use earlier base year.
For any other cases, nominal dollars are converted to constant dollars with the goal of
providing assistance in estimation related to present year or the coming future. It is
always better not to use older dollar values while carrying out estimates for the
current year. Also, only recent base year should be chosen whose data and appropriate
index are readily available. So, when the user is confused in making decision about
which year should be chosen as base year then he should always go for the most
recent base year (Sage Publications, 2015).
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Question 4.
Answer 4.
a and b. Formula Used for calculating Constant Dollars:
Table B: Big East City: Constant Dollar 1995 and 2012 (Refer Appendix for detailed
calculation)
Year
Sign Repair
Expenditures
Price Deflator for Urban
Government
Constant Dollar
1995
Constant Dollar
2012
1995 134486 72.258 134486 235375.6261
1996 144489 73.812 141447.0027 247558.6813
1997 151584 75.219 145616.8876 254856.7591
1998 161148 76.32 152571.1764 267028.0637
1999 175015 79.036 160005.9956 280040.3863
2000 193276 82.482 169318.6054 296339.1933
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Constant Dollars 1995= Nominal Revenue*CPI of 1995/ CPI of Current Year
Constant Dollars 2012= Nominal Revenue*CPI of 2012/ CPI of Current Year

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2001 201670 85.019 171400.1677 299982.3163
2002 203733 86.81 169581.144 296798.685
2003 206568 90.425 165067.0782 288898.2264
2004 223622 94.062 171785.4019 300656.5481
2005 248757 100 179746.8331 314590.5401
2006 286331 100.276 206327.5898 361111.8305
2007 300483 111.112 195409.1423 342002.5073
2008 288316 117.666 177053.1634 309876.1149
2009 247011 116.763 152861.1019 267535.4874
2010 229100 119.579 138438.2525 242292.8064
2011 241111 124.001 140500.4689 245902.0703
2012 247783 126.465 141575.1711 247783
c.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
Nominal Expenditure and Constant Dollar 1995
and 2012
Sign Repair Expenditures Constant Dollar 1995
Constant Dollar 2012
Figure C: Line Graph Showing Nominal Dollars, Constant Dollars
d. Additional Funding Required =Constant Dollar of 2012 – Constant Dollar of 1995
Therefore, it might require an additional funding of $113297. Hence, its demand is
justified.
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References
Federal Reserve Bank of St. Louis, 2007. Economic Snapshot: Nominal vs. Real Oil Prices.
Available at: https://www.stlouisfed.org/publications/inside-the-vault/fall-2007/nominal-vs-
real-oil-prices (14 February, 2020).
Informit, n.d. Nominal Dollars Versus Real Dollars (Also Known as Current Dollars Versus
Constant Dollars). Available at: http://www.informit.com/articles/article.aspx?
p=357685&seqNum=6 (14 February, 2020).
Openstax, n.d. Adjusting Nominal Values to Real Values. Available at:
https://cnx.org/contents/FDAWX8lT@7/Adjusting-Nominal-Values-to-Real-Values (14
February, 2020).
Statistics Canada, 2011. Analytical concepts. Available at:
https://www150.statcan.gc.ca/n1/pub/75f0011x/2011001/notes/analytical-analytiques-
eng.htm (14 February, 2020).
Sage Publications, 2015. Inflation. Available at:
https://us.sagepub.com/sites/default/files/upm-assets/72298_book_item_72298.pdf (14
February, 2020).
United States Census Bereau, 2019. Current versus Constant (or Real) Dollars. Available at:
https://www.census.gov/topics/income-poverty/income/guidance/current-vs-constant-
dollars.html (14 February, 2020).
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Appendix
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