How and when should I adjust (deflate) variables for the effects of inflation?
Only variables that are reported in dollars can be adjusted for inflation. Because the value of a dollar changes over time, inflation adjustments should be made when you want to make comparisons of dollar variables at different points in time. Failing to do so can result in misleading conclusions. For example, if over a 10-year period personal income doubled, but prices also doubled, the real purchasing power of the income has not changed. It’s more important to be more concerned with how much stuff money can buy rather than with the number of dollars involved. Variables that are not adjusted for inflation are called “nominal.” Variables that are adjusted for inflation are called “real.” Before adjusting variables for inflation, you need to determine which type of deflator or price index to use. Two main types of price indexes are used: (1) one that measures the price of goods and services that people buy like the Consumer Price Index and (2) one that measures the value of goods and se
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