Actual Dollar Versus Constant Dollar Analysis
To formalize the relationship between actual dollar and constant dollar analysis, the terms f, i, and i″ (i prime) need to be defined. f is the inflation rate. It's the average annual percentage of increase in the prices of goods and services (also called the escalation rate or the rate of increase in cost of living). It's like the speed of the river current flowing downstream. i is the market interest rate. It's the actual interest rate in effect at any point in time (also called the combined interest rate, current-dollar interest rate, actual interest rate, or the inflated interest rate). It's like the speed of the boat through the water. i″ (i prime) is the inflation-free interest rate (i″). It's ...
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