Investment
Purchasing power of a nominal amount
Raise one plus the annual inflation rate to the number of years, then divide the nominal amount by that factor. This restates future or past money in terms of today's prices.
The Formula
Real Value = Nominal / (1 + i)^n
Raise one plus the annual inflation rate to the number of years, then divide the nominal amount by that factor. This restates future or past money in terms of today's prices.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| N | Nominal amount | currency | The face value of money, with no adjustment for price changes. |
| i | Annual inflation rate as a decimal | decimal | Divide the percentage by 100: 3% becomes 0.03. |
| n | Number of years | years | Fractional years are fine; the exponent handles them. |
| RV | Real value | currency | The amount expressed in the purchasing power of the starting year. |
What Each Symbol Means
Ncurrency
Nominal amount
The face value of money, with no adjustment for price changes.
idecimal
Annual inflation rate as a decimal
Divide the percentage by 100: 3% becomes 0.03.
nyears
Number of years
Fractional years are fine; the exponent handles them.
RVcurrency
Real value
The amount expressed in the purchasing power of the starting year.
See It Worked With Real Numbers
A formula on its own does not tell you which number goes where. The how to calculate purchasing power page applies this equation to a concrete case, shows every intermediate step, and names the mistakes that produce a wrong answer even when the algebra is right.
Where This Formula Appears
This equation is the working core of How To Calculate Purchasing Power, filed under Finance. Every number the guide produces comes from substituting into this one line.