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Further information: Real versus nominal value
economics, a nominal value is an economic value expressed in monetary terms (that is, in units of a currency). By contrast, a real value is a value that has been adjusted from a nominal value to remove the effects of general price level price changes over time. For example, changes in the nominal value of some commodity bundle over time can happen because of a change in the quantities in the bundle or their associated prices, whereas changes in real values reflect only changes in quantities.Real values are a measure of purchasing power net of any price changes over time. For example, nominal income is often restated as real income, thus removing that part of income changes that merely reflect inflation (a general increase in prices). Similarly, for aggregate measures of output, such as gross domestic product (GDP), the nominal amount reflects production quantities and prices in that time period, whereas the differences between real amounts in different time periods reflect only changes in quantities. A series of real values over time, such as for real GDP, measures quantities over time expressed in prices of one year, called the base year (or more generally the base period). Real values in different years then express values of the bundles as if prices had been constant for all the years, with any differences due to differences in underlying quantities.
The nominal/real value distinction can apply not only to timeseries data, as above, but also to crosssection data varying by region. For example, the total sales value of a particular good produced in a particular region of a country is influenced by both the physical amount sold and the selling price, which may be different from that of the country as a whole; for purposes of comparing the economic activity of different regions, the nominal output of the good in that region can be adjusted into real terms by repricing the goods at nationalaverage prices.
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[hide]Calculation[edit]
The nominal value of a commodity bundle in a given year depends on both quantities and thencurrent prices, namely, as a sum of prices times quantities for the different commodities in the bundle. In turn nominal values are related to real values by the following arithmetic definition: nominal value / real value = (P x Q) / Q = P.
 (nominal value / real value) x 100 = P.
Illustrations[edit]
The simplest case of a bundle of commodities (goods) is one that has only one commodity. In that case, output or consumption may be measured either in terms of money value (nominal) or physical quantity (real). Let i designate that commodity and let: P_{i} = the unit price of i, say, $5
 Q_{i} = the quantity of good i, say, 10 units.
 nominal value of good i = P_{i} x Q_{i} = $5 x 10 = $50.
 real value of good i = (P_{i} x Q_{i})/P_{i} = Q_{i} = 50/5 = 10.
Similarly for a series of years, say five, given only nominal values of the good and prices in each year t, a real value can be derived for each of the five years:
 real value in year t = (nominal value in year t) / (price relative to base year) = Q_{i}^{t}.
 real value in year t = (nominal value in year t) / P^{t}.
Numerical example: If for years 1 and 2 (say 20 years apart) the nominal wage and price level P of goods are respectively

A sum of nominal values for each of the different commodities in the bundle is also called a nominal value. A bundle of n different commodities with corresponding prices and quantities for each year t defines:
 nominal value of that bundle in year t = P_{1}^{t} x Q_{1}^{t} + . . . + P_{n}^{t} x Q_{n}^{t}.
 P^{t} = the value of a price index in year t.
 real value of the bundle in year t = Q^{t} = (nominal value of the bundle in year t) / P^{t}.
 nominal value of the bundle in year t = P^{t} x Q^{t}.
Price indices[edit]
Real values (such as real wages or real gross domestic product) can be derived by dividing the relevant nominal value (e.g., nominal wage rate or nominal GDP) by the appropriate price index. For consumers, a relevant bundle of goods is that used to compute the Consumer Price Index (CPI). So, for wage earners as consumers a relevant real wage is the nominal wage (aftertax) divided by the CPI. A relevant divisor of nominal GDP is the GDP price index.Real values represent the purchasing power of nominal values in a given period, such as wages or total production. In particular, price indexes are typically calculated relative to some base year. If for example the base year is 1992, real values are expressed in constant 1992 dollars, referenced as 1992=100, since the published index is usually normalized to have the price index equal 100 in the base year. To use the price index as a divisor for converting a nominal value into a real value, as in the previous section, the published index is first divided by the baseyear priceindex value of 100. In the U.S. National Income and Product Accounts, nominal GDP is called GDP in current dollars (that is, in prices current for each designated year), and real GDP is called GDP in [baseyear] dollars (that is, in dollars that can purchase the same quantity of commodities as in the base year). In effect the price index of 100 for the base year is a numéraire for priceindex values in other years.
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 a given quantity.
Interest rates[edit]
Main article: Fisher equation
Since interest rates are measured as percentages rather than in terms of units of some currency, real interest rates are measured as the difference between nominal interest rates and the rate of inflation. The expected real interest rate as of the starting time of a loan is the nominal interest rate minus the inflation rate expected over the term of the loan. The realized (ex post) real interest rate is computed by subtracting the actual inflation rate that ends up prevailing during the life of the loan from the nominal interest rate, and reflects what actually happened during the life of the loan.The relationship above is approximate only. The actual relationship is:^{[1]}
 (1+IR_{N})=(1+IR_{R})x(1+I),
 IR_{N} is the nominal interest rate,
 IR_{R} is the real interest rate, and
 I is the inflation rate.
See also[edit]
 Constant Item Purchasing Power Accounting
 Aggregation problem
 Classical dichotomy
 Costofliving index
 Deflation
 Financial repression
 Index (economics)
 Inflation
 Inflation accounting
 Money illusion
 National accounts
 Neutrality of money
 Numéraire
 Peppercorn (legal), a nominal fee paid to fulfill a contractual requirement
 Real interest rate
 real prices and ideal prices
Notes[edit]
 Jump up ^ Benninga, Simon; Oded Sarig (1997). Corporate Finance: A Valuation Approach. The McGrawHill Companies. p. 21. ISBN 0070050996.
References[edit]
 W.E. Diewert, "index numbers," ([1987] 2008)The New Palgrave Dictionary of Economics, 2nd ed. Abstract.
 R. O'Donnell (1987). "real and nominal quantities," The New Palgrave: A Dictionary of Economics, v. 4, pp. 9798 (Adam Smith's early distinction vindicated)
 Amartya Sen (1979). "The Welfare Basis of Real Income Comparisons: A Survey," Journal of Economic Literature, 17(1), pp. 145.
 D. Usher (1987). "real income," The New Palgrave: A Dictionary of Economics, v. 4, pp. 10405
External links[edit]
 DataBasics: Deflating Nominal Values to Real Values from Federal Reserve Bank of Dallas
 CPI Inflation Calculator from U.S. Bureau of Labor Statistics

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