Real versus nominal value
From Wikipedia, the free encyclopedia
Nominal values in economics are values of anything expressed current monetary terms, as opposed to real values, which are expressed in terms of a good or a bundle of goods. Nominal values change as a result of inflation but real values do not.
Nominal numbers - such as nominal wages, or nominal gross domestic product - refer to amounts that are paid or earned in money terms.
Real value, such as real wages, or real gross domestic product, are derived by dividing the relevant monetary value by the price of a relevant good, or a price index of a bundle of goods (in this case, the bundle may change over time). Real values represent the purchasing power of wages, interest, or total production. That is, they calculate the quantity of the given good or bundle of goods a given nominal wage, or nominal domestic income will buy.
In the simple case of a single good, output or consumption may be measured either in terms of monetary value (nominal) or actual physical quantity (real).
In most cases, price indexes are calculated relative to some base year. If, for example, the base year is 1992, real values may be expressed in constant 1992) dollars)
The price index or infation measure that is used to normalize the purchasing power unit can vary.
For wage earners, the relevant bundle of goods is that used to compute the Consumer Price Index in some given base year for which the CPI is set to 1. So, the real wage is the nominal wage divided by the CPI.
For measures of national product, such as Gross Domestic Product the relevant bundle of goods is that which makes up national product, and the price of this bundle is measured by the GDP Deflator.
The terminology of classical economics used by Adam Smith used a unit of labour as the purchasing power unit,so monetary quantities were deflated by wages to indicate the number of hours of labour required to produce or purchase given quantity.
There are other measures of inflation used in other situations.
Nominal values are the default in most real life situations. Taxes are applied to nominal income, mortgages are written with nominal interest rates, wage agreements are written with nominal rate increases. These nominal rates are likely to have an inflation presumption built in, and only time will tell if the presumption was correct.
[edit] Real and nominal interest rates
- Real interest rates are measured as the difference between nominal interest rates and the rate of inflation
- The expected real interest rate is the nominal interest rate minus the inflation rate expected over the term of the loan.
- The realized (ex post) real interest rate has the actual inflation rate subtracted from the nominal interest rate.
[edit] See also
es:Valor nominal it:Valore nominale he:ריאלי לעומת נומינלי בכלכלה
