How do they convert to 2020 dollars and vice versa?

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I often read things where it will say something like “It cost X$ in 1970, the equivalent of Y$ today”. Or the other way around. Is it tied into a single thing, like the price of gold? Or is it something more esoteric like the Federal interest rate? Do all sources figure it the same way? How accurate is it? I.E. if it is tied to the price of gold or something, can you look back and see that that was the price of a loaf of bread?

In: Economics

4 Answers

Anonymous 0 Comments

We know what items/services/etc cost historically, and can calculate based on that.

(I’m going to make up numbers out of laziness here, so don’t take them too seriously)

If we say the living costs for a single adult today is about $2000/month, and have records that the cost in 1960 was $500, we can say that

$500[1960]=$2000[2020]

Some basic math gives us the relative value is a single dollar

$500/500[1960]=$2000/500[1960]

$1[1960]=$4[2020]

Knowing that, you can now figure out the relative value of *anything* sold in 1960. $100 car? $4000 today. $1.5 million yacht? $6 mill today. Etc.

Again, numbers totally imaginary here, but that should give you the idea.

Anonymous 0 Comments

They take what something cost back then and multiply it by an inflation index.

Government statisticians keep track of how much a number of everyday goods and services (food, energy, clothing, transportation, cigarettes, rent, medical services, etc.) cost the average consumer over time. In general, things get more expensive as time goes on. This is “inflation” which is actually a de-valuing of currency. Using those statistics they can somewhat accurately measure the de-valuing of currency in general over a given time period.

Say last year a loaf of bread cost $1. Today it costs $1.03. That’s a 3% rate of inflation on a loaf of bread. Measure the same increase or decrease in prices among a whole host of other everyday goods and services and you come up with the current rate of inflation. Measure this over time and you will be able to calculate a compounding effect and, with reasonable accuracy, you can look back to the price of what something cost 100 years ago and estimate what buying power you would need in today’s market to buy a similar product or service.

The rate of inflation is not uniform among all goods and services. Gold is a commodity which is subject to more market influences than other goods, but there is still an inflationary element in the price of gold over time. The price of a loaf of bread over time can be more accurately measured by applying an inflation index since bread is an everyday commodity with a low value which everyone buys.

Anonymous 0 Comments

there is a socalled “basket of goods and services” which is designed to mirror “average” consumer spending.

this basket is updated regularly to reflect the actual spending (like people didnt buy smartphones in the 70s and they dont really buy record players anymore these days).

by tracking the prices for goods inside this basket from one year to the next they can calculate “inflation” aka the rate at which the general cost of living increased. (prices dont automatically go up, and in some sectors they actually go down over time, but in general the cost of living increases over time)

since we’ve done that for decades now, we can just take the price from <insert old date here> and multiply it by the cumulated inflation rate (= the rate you get if you add the yearly inflation from each year to the next until you get to today).

Anonymous 0 Comments

The government tracks inflation by monitoring the price of many things and weighting them all based on their contribution to everyone’s cost of living. It’s a complex process and difficult over very long periods because our way of life changes.