Homework Lance
Nominal dollars reflect the current value of currency without any adjustment for inflation. Over the time, the value of the dollar changes, this is caused by several factors, one of them being inflation. The nominal income shows us how the income is increasing or falling, while the constant income shows the changes in national income due to inflation or increase in costs. In the case presented in this question, the data given enabled us to see the growth in national income by plotting the line graph for the nominal values across all the years. When we want to take into consideration the effect of inflation, we use the CPI and nominal dollars to calculate the constant dollars.
The constant dollar should be calculated using different years as the base. We can then use the constant values obtained to determine the effect of inflation on changes in the national income over the years. To do this, we select different years to use as the base, then multiply the nominal income by that year’s CPI to get the constant income. In this question, we calculated the constant income for three different years and found that the value was almost the same. The sense in using different years as the base is to account for the different rates of costs increase/decrease as well as inflation so as to get an accurate picture of the situation.
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