What Is Real Value?
The real value of an item is its nominal value adjusted for inflation. Recall that nominal value is the face value of an item before any adjustments are factored in.
Also known as relative price, real value compares the cost of an item to those of other goods and services. This helps to gauge how much an item's value has fluctuated relative to a representative basket of other items purchased by consumers.
Key Takeaways
- The real value of an item, also called its relative price, is its nominal value adjusted for inflation.
- Real values are more important than nominal values for economic measures, such as gross domestic product (GDP) and personal income.
- The nominal value of time-series data, such as GDP and income, is adjusted by a deflator to derive real values.
Understanding Real Values
Real values are used to measure more than just the value of goods and services. They are also applied to economic measures, such as gross domestic product (GDP) and personal income, because they help ascertain the extent to which increases over time are driven by inflation as opposed to what is driven by actual growth.For example, if personal income is $50,000 in year one and $52,000 in year two, and the rate of inflation is 3%, then the nominal growth rate of income is 4% [($52,000 – $50,000) ÷ $50,000], while the real growth rate is only 1% (4% – 3%).
Real value is obtained by removing the effect of price level changes from the nominal value of a good, service, or time-series data, so as to obtain a truer picture of economic trends. The nominal value of time-series data, such as GDP and income, is adjusted by a deflator to derive real values.
In the U.S., the Bureau of Economic Analysis (BEA) maintains the GDP deflator that is used to compute the real rate of economic growth. The deflator currently uses 2017 as the base year, which means that it is set to 100 for 2017, with other years reported relative to the 2017 dollar's purchasing power.
Real Value vs. Perceived Value
Real value is fairlyeasy to measure. A business must account for the costs of labor, raw materials, shipping, marketing, and product development, which allows it to calculate the product's real value. Perceived value isn't as easy, since many factors that play into it aren't tangible or precisely measurable.Factors such as scarcity (including artificial scarcity), marketing efforts, novelty, and brand associationsall play into perceived value.
For example, two businesses may sell similar cars that cost the same amount to produce, giving them identical real values. However, one car will likely have a higher perceived value if its maker has a reputation for reliability and if the car is thecenter of a national marketing campaign that successfully builds buzz.
The impact of real and perceived values, and the differences between them, become real in sales numbersand in the pricing of products. A higher perceived value will lead consumers to think that a product is better than other items with the same real value selling for a similar price.
At the same time, the price can impact the perceptions of value. For example, businesses that release special limited editions of existing products can sometimes create a sense of a higher perceived value, due to exclusivity and novelty, even if the product has the same real value as an existing item that sells for a lower price.
What Is an Example of a Real Value?
Consider the case of a worker who is negotiating an end-of-year salary increase. Imagine that inflation has increased the average cost of living in their region by 3% over the past year. Now, if this worker is offered a raise of 2%, then the real value of their earnings will have fallen relative to the cost of living, even though their salary may nominally increase. If the worker is offered a raise of 3%, their salary will also nominally increase, while staying on par with the cost of living in real terms. However, if they are offered a raise of 4%, then they will be securing both a nominal raise and a real raise.
What Does It Mean When a Value Is Real?
When a value is real, this means that inflation has been factored into its calculation. This is unlike nominal value, which is the face value, or its value measured in absolute terms.
In What Cases Are Real Values Used?
Economists, policymakers, and the general public all find utility in real values. Experts might be interested in real GDP over nominal GDP when trying to gauge how much economic output has truly increased, rather than just nominally due to inflation. People may use real value to assess whether their earnings are rising at the same rate as inflation.
The Bottom Line
Real value is nominal value adjusted for inflation. It can be applied to consumer purchases, such as goods and services, as well as to economic indicators, such as GDP. Whereas nominal value is the current or face value of something, real value measures its relative value.
FAQs
Real value is nominal value adjusted for inflation. It can be applied to consumer purchases, such as goods and services, as well as to economic indicators, such as GDP. Whereas nominal value is the current or face value of something, real value measures its relative value. U.S. Bureau of Economic Analysis.
What is nominal vs real value examples? ›
If you earn 2,000 euros every month, 2,000 euros is the nominal value of your pay. But if inflation for the year is 4%, your pay enables you to buy fewer things since 2,000 euros minus 4% is 1,920 euros. Therefore, your real purchasing power relative to the base year has fallen.
What is the difference between nominal calculations and real calculations? ›
Nominal Gross Domestic Product (nGDP) is GDP calculated with current prices being configured into the equation. Nominal GDP is not adjusted for inflation rates over time. Real Gross Domestic Product (rGDP) is calculated with constant prices so the total is adjusted for inflation in a given period.
What is the difference between nominal and real definitions? ›
Defining is either giving the meaning of words or other linguistic things, which is called “nominal definition” or clarifying a given meaning, which is a proposition or property or relation, by showing it to be a compound of other propositions or properties or relations, which is called “real definition”.
What is the difference between nominal and real numbers? ›
The nominal value is the current value, without taking inflation or other market factors into account. It is the face value of the good. The real value is the nominal value after it has been adjusted for inflation. Inflation is an overall increase in price across the entire economy.
What is nominal vs real for dummies? ›
The real value of an item is its nominal value adjusted for inflation. Recall that nominal value is the face value of an item before any adjustments are factored in. Also known as relative price, real value compares the cost of an item to those of other goods and services.
What is a nominal value example? ›
Examples of nominal values include: The prices of items in a supermarket. The value of deposits in a bank account. The amount of a paycheck. The face value of a bond.
What is an example of a nominal variable and a real variable? ›
According to the classical dichotomy, real variables, such as real GDP, consumption, investment, the real wage, and the real interest rate, are determined independently of nominal variables, such as the money supply.
How to convert nominal values to real values? ›
Convert Each Nominal Value to Real Value
Divide the nominal value by the ratio of the price index at that specific time to the base year's price index. Make sure to do this for each time period in the series.
What does real value mean in math? ›
Real versus nominal value: real values are the actual values of something while nominal values are the stated values of something.
Key Takeaways
The real value of a security is its market value or an adjusted price that accounts for price level changes that have occurred over time. To determine the difference between the two numbers, simply subtract the smaller number from the larger number.
What is a nominal example? ›
Nominal data is labelled into mutually exclusive categories within a variable. These categories cannot be ordered in a meaningful way. For example, preferred mode of transportation is a nominal variable, because the data is sorted into categories: car, bus, train, tram, bicycle, etc.
What is a nominal definition example? ›
nominal adjective (NOT REALLY)
in name or thought but not in fact or not as things really are: She's the nominal head of our college - the real work is done by her deputy. SMART Vocabulary: related words and phrases. True, real, false, and unreal.
Is money supply a nominal or real variable? ›
For example, an increase in the money supply, a nominal variable, will cause the price level, a nominal variable, to increase but will have no long - run effect on the quantity of goods and services the economy can produce, a real variable.
What is the formula real to nominal? ›
Nominal vs.
Unlike the nominal rate, the real interest rate takes the inflation rate into account. The equation that links nominal and real interest rates can be approximated as nominal rate = real interest rate + inflation rate, or nominal rate - inflation rate = real interest rate.
Does 0 count as a real number? ›
Yes, 0 is a real number in math. By definition, the real numbers consist of all of the numbers that make up the real number line. The number 0 is at the center of the number line, so we know that 0 is a real number. Furthermore, 0 is a whole number, an integer, and a rational number.
What is an example of a nominal rate vs real rate? ›
For example, if the inflation rate is 5%, on a one-year loan of $1,000 with an 8% nominal interest rate the real interest rate would be 8% minus 5% or 3%. The real interest rate will usually be lower than then nominal interest rate.
What is an example of nominal vs real GDP? ›
For example, if an economy's prices have increased by 1% since the base year, the deflating number is 1.01. If nominal GDP was $1 million, then real GDP is calculated as $1,000,000 / 1.01, or $990,099.
