## Purchasing Power of the Dollar

Hello all. Was in vent this evening, and @LEGERdeMAIN mentioned something about the declining value of the dollar. Being the ADHD-analyzer-excel-weirdo that I am, I decided to grab some historical exchange rate data, along with historical inflation rates, to create a graph illustrating the change in the real relative purchasing power of the dollar.

EDIT: This title is sort of a misnomer. This is actually the relative purchasing power of US goods, not the dollar.

Why the inflation rate is important?

Assume that in 1990 we were able to get 200 floncs for 1 dollar, and assume that in 2013 we're still able to get 200 flocs for 1 dollar. Now, suppose the value of the flonc has remained relatively stable, but the value of the dollar has experienced inflation such that 1 dollar in 2013 has the same domestic purchasing power as .5 dollars back in 1990. This means that the real exchange rate in 2013, relative to 1990, is actually 400 floncs for 1 dollar. This is because we can sell goods in the US for twice as many dollars today, trade those dollars for floncs, and thus buy twice as many goods in the nation of Floncs. So, the purchasing power of work in the US is worth twice as much now as it was back in 1990.

This may seem counter intuitive, because typically inflation is perceived as a bad thing. The thing is, in this example, we're assuming that the exchange rate between the dollar and the flonc remains the same, while the relative inflation rates are substantially different. In truth, typically, when one country experiences high rates of inflation relative to another country, the nominal exchange rates actually change in response, effectively keeping real exchange rates roughly the same. However, these natural offsets don't keep the real exchange rates exactly the same, and therefore we need to account for inflation when considering the real relative purchasing powers of currencies.

What follows is a graph of the historical relative purchasing power of the dollar (US Goods), as a percentage of 2008 relative purchasing power.