5

I have seen some documentaries mentioning some amount of money in a particular year and then telling how much would it worth today. One such example is on the Wikipedia page of Pablo Escobar, which says:

He was often called "The King of Cocaine" and was the wealthiest criminal in history, with an estimated known net worth of US $30 billion by the early 1990s (equivalent to about $55 billion as of 2016), making him one of the richest men in the world at his prime.

How do they calculate that $30 billion in 1990 would be equal to $55 billion in 2016? What are the calculations, parameters and assumptions(if any) that lie behind this calculation?

3

There are two ways to measure the value of money in the past.

1) As Victor mentioned there are inflation statistics covering the last 100 or so years that value the currency against an ever-changing basket of goods. This is sufficient when measuring general inflation over the period of the hundred years where there is data. This is how it was measured in your example.

2) For older time periods or where a value comparison is required between specific items (particularly where these were not in the basket of goods used for the inflation calculation) Historical records of the price of comparable goods can be used. This is in effect the same as mark to market valuations for illiquid financial instruments and requires poring through records to find the price of either a comparable basket of goods to one that would be used for inflation calculations today or a comparable set of items. An example of this is finding the value of a particular type of house (say a terraced house in London) in the 19th Century compared to the same house today by finding records of how much comparable houses would sell for, on average, then and now.

This second measure is also used where the country in question didn't or doesn't keep reliable inflation statistics which may well be true of Colombia in the 90s. This means that there is a chance that this way of estimating Escobar's wealth in today's terms may have also been used.

Another notable reason to use this methodology is that (unless you are using exchange rates in purchasing power parity terms) the value of money held in different currencies is different. This is even true today as the value of $1 in INR in India is likely to be higher than the value of a dollar in the US in terms of what you can buy. Using this methodology allows for a more accurate comparison in values where different countries and currencies are involved.

2

It has got to do with inflation. So as prices of goods and services rise over the years you can work out what the inflation rate is over time. So by applying the inflation rate between 1990 to 2016 you can work out the equivalent value of $30B in 1990 would be in 2016. So in other words in 1990 you bought $30B worth of a box of goods and services, then in 2016 it would have cost you $55B to buy the same box of goods and services.

You can play around with this US Inflation Calculator here, to see how much an amount of money back in history would be worth today if invested at the rate of inflation over those years.

So obviously, the aim in investing is to get a return higher than the rate of inflation, so that your investment funds grow in real terms and in the future you can buy more with your funds than you can buy with them today.

0

This answer is based to the book Fundamentals and Techniques of Financial Management and where you can found the explanation of Value of Money in Time. Referencies: Braga, Roberto, 1937 - Fundamentos e Técnicas de administração financeira/Roberto Braga.- 1.ed - 23.reimpr. -São Paulo : Atlas, 2015.

In the Financial Math deals with: Currency - Corresponding to payments and / or receipts of a transaction Time - Regarding the period between the date of the operation and the periods in which payments or receipts should occur Interest - Regarding the remuneration due for the use of the money during the term of the operation.

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