Present Value in the United States

Present Value (Economics Term) in the Federal Budget Process

Meaning of Present Value in the congressional and executive budget processes (GAO source): The worth of a future stream of returns or costs in terms of money paid immediately (or at some designated date). (Differs from Net Present Value.) A dollar available at some date in the future is worth less than a dollar available today because the latter could be invested at interest in the interim. In calculating present value, prevailing interest rates provide the basis for converting future amounts into their “money now” equivalents.

Legal Materials

There are two kinds of present value calculations — one where you figure the present value of money held in the past and one where you project what the present value of money held now will be in the future.

Money held in the past: To figure the present value of money held in the past, you need a measure of inflation, usually the Consumer Price Index (CPI). To get the U.S. CPI for past years, see “Consumer Price Index.” To do the calculations, use the What’s a Dollar Worth? calculator posted by the home page of the Federal Reserve Bank of Minneapolis or the BLS’s CPI Inflation Calculator. For directions on how to do the calculations by hand, see Understanding What A Dollar Is Worth and/or the What is a Dollar Worth page by the Minneapolis Fed.

See also “Cost of Living.”

Money held in the future: To figure the present value of money in the future, you have to posit an interest rate. If you can do that, use the Present Value calculator posted by the University of Illinois at Chicago to find out how much money in the future is worth now. (This is useful if, for example, you want to know how much you have to invest in 8% bonds if you want to get $1 million in 2025).

For more calculators and calculations (e.g., loans), try the MegaConverter,Measuringworth.com and/or the Inflation/Cost-of-Living section of Mardindale’s Calculators Online Center.

Resources

See Also

• Discount Rate
• Net Present Value
• Federal Appropriations
• Entries about the United States Budget Process in the Encyclopedia (including Present Value)
• Public Debt
• Consumer Price Index (CPI)
• Cost of Living
• Future Value

Further Reading

• Legislatures and the budget process: the myth of fiscal control(J Wehner, 2010)
• Reconcilable Differences?: Congress, the Budget Process, and the Deficit (JB Gilmour, 1990)
• Fiscal institutions and fiscal performance(JM Poterba, J von Hagen, 2008)