Do YOU know the difference?
There are plenty of economic terms you may come across while reading the news or discussing economic issues with your friends. However, a great number of these terms are often misused or simply not understood by the general public.
If you want to be one of those who can use these terms properly, the only thing you need to do is to follow our series on Easily Confused Economic Terms!
NOMINAL and REAL
refer to two completely different sets of values. Generally speaking, REAL is a value that has been adjusted for inflation (general increase in prices) while NOMINAL is a value without inflation being taken into account. As you see, the key word here is INFLATION:
REAL rate = NOMINAL rate – INFLATION rate
Why should it matter to YOU ?
Well, if your salary is increased by 10 % AND inflation is also running at 10% then your REAL increase will be ZERO! So, here is the lesson to learn from this: If you hear the good news that your salary will be increased by 10%, you’d better ask first:
Will my nominal OR my real salary increase?!?..
What about ‘current’ and ‘constant’ data?
While speaking about nominal and real values, you may also come across the terms ‘current’ and ‘constant’. If, for example, price data for the year 2015 are shown in current (NOMINAL) terms, then data are based on 2015 prices. To the contrary, when data are reported in constant (REAL) terms, then they are presented in the value of a specific base year (e.g. data for 2010, 2011, 2012 shown in 2015 prices)
See also: http://economics.about.com/cs/macrohelp/a/nominal_vs_real.htm
And now, take this quick Quiz to practice what you have learned!
Real or Nominal?
A quick 4-Q Quiz
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