Question

As you have seen in this chapter, a dollar today does not have the same value as a dollar in the future or a dollar received in the past. At the time of his death in 1937, John D. Rockefeller was estimated to be worth $1.4 billion. Go to the Bureau of Labor Statistics at the top of the page, and select “Calculators” in the drop-down menu. Click the calculator icon next to “Inflation.” How much would Rockefeller’s fortune be worth in today’s dollars? Now let’s consider a hypothetical situation where you are worth $1 million at the end of World War II. Using the same CPI tool, calculate how much you would need today to maintain the same purchasing power as in 1945. Assume that the rate of inflation for the next 30 years is the same as the last 30 years. How much will you need to have the same purchasing power as you have today?

Answer 1

Solution

Case A : Worth of John D. Rockefeller

Worth in 1937 = $ 1.4 Billion

Inflation rate = CPI inflation calculator from BLS website to be used.

Worth today = ? (we need to find out )

By using calculator of inflation (CPI inflation) from Bureau of Labor Statistics website that the worth of $ 1 of August 1937 is $ 17.69 today ( i.e. August 2019).

Therefore, worth of $ 1.4 billion will be 1.4 * 17.69 = $ 24.766 billions Ans

Also the method this calculator is using can be understand by below formula :

Future value = Amount * ( 1+ r )ⁿ

where, r = inflation rate

n = number of periods

Case B

For knowing the value or purchasing power of one million dollars of 1945 today we will use the above formula :

Amount * ( 1 + r )ⁿ

where, Amount = $ 1 million

r = inflation rate ( to be taken from BLS website ) 3.6 %

n = 74 years

= $ 1 million * ( 1 + 0.0364 )⁷⁴

= $ 1 million * ( 1.0364)⁷⁴

= $ 1 million * 14.10

= $ 14.10 million Ans

The purchasing power of $ 14.10 million of today is equal to $1 million of 1945.