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Real Versus Nominal Prices

According to our Real Versus Nominal Prices assignment writers, all economic magnitudes can be expressed in real or nominal terms. It is essential to know the difference so that we are not deceived when giving a news item. To explain this, we will follow the example of the difference in the increase in nominal or real GDP.

In general, nominal quantities are those that are "raw". Of course, inflation is also essential. Precisely what real magnitudes do is subtract the effect of inflation from the nominal magnitude.

When spoken in real terms, it refers to base year prices. That is, a specific year is set as a reference and the prices of the base year of the products to be studied are taken. In this way, the effect of inflation is excluded from the studies. The process of converting a nominal value to real terms is precisely called an inflation adjustment. And thanks to this adjustment, actual values are an excellent measure of net purchasing power, regardless of price changes over time.

When speaking in nominal terms, on the contrary, the value of the products is in current prices, that is, taking into account the prices that are in the market at the time of the study, so we include inflation or loss of capacity purchase of the currency.

This is of great importance. Suppose we hear on the news that the economy is growing at a rate of 2% per year, that is, GDP is growing at 2%. In this case, we must ask ourselves: Is it real or nominal data?

Real = Nominal - Inflation

If it is nominal data, the amount that the economy has grown in monetary units includes both the increase in the number of products sold and the increase in their prices.

If the data is real, the price increase will be excluded, since everything is valued at prices of the year taken as a base, therefore, we will only be referring to the number of final units sold without taking into account the price variation. Hence it is called real since we observe physical growth itself.

Then, we must understand that if the economy grows at 2% in nominal terms, but in turn, prices increase by 3%, in reality, the economy is decreasing by 1%. In the country, fewer final products are sold at a higher price, so in reality, there is a setback, and people can buy fewer things with the same amount of money.

It is important to mention that this method (subtracting percentages) is only valid for small percentages. In the case of higher percentages, other calculations will have to be used.

Difference Between Real Value, Nominal Value, And Market Price

It is important to distinguish between real value, nominal value, and market price. Depending on the difference between this price paid and the nominal value that was attributed to this asset, we will say that it will have been paid above the nominal value ( above par ), below the nominal value ( below par ), or being exactly equal to the nominal value ( at par ).

Role Of Inflation In Real And Nominal Prices

Since all economic magnitudes can be expressed in real or nominal terms, it is necessary to know what difference exists between these two concepts. We explain them to you within the microeconomics assignment help.

Nominal prices, also known as current prices, refer to the valuation of a product or service in current euros. That is, those that attend to the prices that exist in the market at the right moment of the study, including inflation. In other words, valuing a product at nominal prices means considering the price paid for the product.

To give a practical example, let's take it to our payroll. If we earn 1,000 euros per month, the nominal value of our salary is exactly those 1,000 euros.

Actual prices, or prices in monetary units, concerning the base year prices. Taking a specific year as a reference, the prices of the products that we want to study during that period are set with the objective of observing the growth or decrease of a given variable over time. What is left out in the study of real prices is the effect of inflation. Precisely, the process of converting a nominal value to a real value is called inflation adjustment.

Continuing with the example of our payroll, if we earn 1,000 euros we would have to discount the inflation of the specific year that we are analyzing. If inflation for that period was 3%, our real salary is 970 euros.

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