# How To Calculate Forex Buying Power

Prices have a way of increasing from year to year, so most of the goods and services that we buy tend to cost more next year than it does now. Over enough years, even small annual price increases add up to cause many goods and services to become more expensive.

For instance, everyone knows that a gallon of milk costs much more today than it did a few years ago.

Another way to look at increasing prices (called inflation) is that the purchasing power of your dollar decreases with time. For example, in 1950 one dollar bought a more than its does today - a candy bar used to cost a nickel.

Here is an example. Suppose that in 2007 you made a \$200,000 salary and in 1970 you made \$50,000.

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Which salary gave you more purchasing power?

The calculator converts the \$200,000 to 1970 dollars and compares the two salaries. Press the Calculate button and \$37,426.09 is displayed in the Dollar Value field.

So the 2007 salary, when converted to 1970 dollars, has 33.597 percent less ((\$37,426.09 - \$50,000) / \$50,000) purchasing power than you had in 1970 with the \$50,000 income.

Another way to compare the two salaries is to convert the \$50,000 to 2007 dollars. Enter 50000 in the Amount field.

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Enter 1970 in the Convert From date field and enter 2007 in the Convert To date field. The result is \$267,193.30, which means that the 1970 salary expressed in 2007 dollars bought 25.15 percent more than your 2007 salary.

The two approaches give the same logical result - you had more purchasing power in 1970 than you did in 2007.

## Computational Notes

The computations in the calculator are based on the annual Consumer Price Indices (CPI) which are published by the U.S. Bureau of Labor Statistics.

## PPP (Purchasing Power Parity) Exchange Rates

For the salary example, to convert the 2007 salary to 1970 dollars use the following procedure:

2007 Salary in 1970 dollars = 2007 salary * (1970 CPI / 2007 CPI)
2007 Salary in 1970 dollars = 200000 * (38.8 / 207.342)
2007 Salary in 1970 dollars = \$37,426.09

To convert the 1970 salary to 2007 dollars use the following procedure:

1970 Salary in 2007 dollars = 1970 salary * (2007 CPI / 1970 CPI)
1970 Salary in 2007 dollars = 50000 * (207.342 / 38.8)
1970 Salary in 2007 dollars = \$267,193.30

## Related Calculator

Inflation Calculator