In economics, the distinction between nominal and real numbers is often made. It corresponds to the distinction between money and inflation-corrected numbers. Economics (deriving from the Greek words οίκω [oeko], house, and νέμω [nemo], distribute) is the social science that studies the allocation of scarce resources. ...
Nominal numbers - such as nominal wages, interest rates and gross domestic product (GDP) - refer to amounts that are paid or earned in money terms. A paycheck shows money wage and a car loan agreement indicates the nominal interest rate. Nominal GDP refers to the amount of money spent to buy the production of a country. An interest rate is the rental price of money. ... For GDP in neuroscience see Giant depolarizing potentials. ... Money is a marketable good or token that acts as a store of value, a medium of exchange and a unit of account. ...
Real numbers - real wages, interest rates, and GDP - are corrected for the effects of inflation. They indicate the value of these numbers in terms of the purchasing power of wages, interest, or total production. That is, they try to estimate how many goods and services a wage, an interest payment, or total domestic income will buy. In economics, purchasing power refers to the amount of goods and services a given amount of money -- or, more generally, liquid assets -- can buy. ...
real wage is the ratio of the nominal wage to some measure of the price level (for example, the consumer price index).
the real interest rate is different, since it must be adjusted for the effects of inflation over time on money that is lent. A first approximation for the real interest rate equals the nominal interest rate minus the rate of inflation over the period of the loan.
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.
In the real world, the real interest rate can only be seen in debt instruments such as Treasury Inflation Protected Instruments, which establishes a real interest rate before-hand, with no guessing involved on the part of the investor.
the calculation of real gross domestic product is also different from the real wage. As a first approximation, real GDP is calculated by adding up all the goods and services in the economy produced during a year using the prices that prevailed during the base year. Thus the 2004 GDP in 1982 prices (the inflation-corrected GDP) would add up all the 2004 products using the prices that ruled in 1982.
Recently, the US has adapted a new method of measuring inflation using chained values instead of a base year, see consumer price index. Consumer price index - Wikipedia /**/ @import /skins/monobook/IE50Fixes. ... An interest rate is the rental price of money. ... For GDP in neuroscience see Giant depolarizing potentials. ... Consumer price index - Wikipedia /**/ @import /skins/monobook/IE50Fixes. ...
By exercising his real option, Thales was able to profit greatly from the bumper crop, since the olive press owners were obligated by the real option contract to follow through on their agreement and rent the facility to him at the specified price, while he turned around and subletted it for a very high premium.
As we've illustrated in these two examples, the appeal of real option models is their ability to assign a positive value to uncertainty - a fixed price can be paid for the right to profit from a bumper olive crop, for example, but that right need only be exercised if it proves profitable.
The real options approach makes investors think about hidden assets, and in relatively simple situations, real options can prove a valuable tool for an investor considering a business opportunity - be it purchasing a piece of real estate or determining the fair value of a potential investment in common stock.
But despite the frequent use of price controls, and despite the superficial logic of their appeal, economists are generally opposed to them, except perhaps for very brief periods during emergencies.
Prices in fl markets may be above not only the official price, but even the price that would prevail in a free market, because the buyers are unusually desperate and because both buyers and sellers face penalties if their transactions are detected.
Price controls may limit these costs of disinflation by prohibiting wage increases that are out of line with the new trends in demand and prices.
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