In economics, nominal value refers to any price or value expressed in money of the day, as opposed to real value, which adjusts for the effect of inflation. Examples include a bundle of commodities, such as gross domestic product, and income. For a series of nominal values in successive years, different values could be because of differences in the price level, an index of prices. But nominal values do not specify how much of the difference is from changes in the price level. Real values remove this ambiguity. Real values convert the nominal values as if prices were constant in each year of the series. Any differences in real values are then attributed to differences in quantities of the bundle or differences in the amount of goods that the money incomes could buy in each year. Thus, the real values index the quantities of the commodity bundle or the purchasing power of the money incomes for each year in the series. The nominal/real value distinction can apply not only to time-series data, as above, but to cross-section data varying by region or householder characteristics. Nominal values are related to prices and quantities (P and Q) and to real values by the following definitions: nominal value = P•Q = P•real value. Face-to-face trading interactions on the New York Stock Exchange trading floor. ... For the surname, see Price (surname). ... Value is worth in general, and it is thought to be connected to reasons for certain practices, policies, actions, beliefs or emotions. ... A good or commodity in economics is any object or service that increases utility, directly or indirectly, not to be confused with good in a moral or ethical sense (see Utilitarianism and consequentialist ethical theory). ... GDP redirects here. ... The price level is a measurement of the average level of prices in an economy. ... In economics and finance an index (for example a price index, a stockmarket index) is a benchmark of activity, performance or any evolution in general. ... A good or commodity in economics is any object or service that increases utility, directly or indirectly, not to be confused with good in a moral or ethical sense (see Utilitarianism and consequentialist ethical theory). ... Purchasing Power- the amount of value of a good/services compared to the amount paid. ... In statistics, signal processing, and econometrics, a time series is a sequence of data points, measured typically at successive times, spaced at (often uniform) time intervals. ... A cost-of-living index measures the cost of goods and services, typically over time. ...

Illustration, notation, and generalization

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 i, say, 10 units.

The nominal value of the bundle would then be price times quantity:

nominal value of i = P_i x Q_i = $5 x 10 = $50.

Given only the nominal value and price, derivation of a real value is immediate:

real value of bundle i = P_i x Q_i/P_i = Q_i = 50/5 = 10.

The price "deflates" (divides) the nominal value to derive a real value, the quantity itself.

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 of bundle i in year t = nominal value of Q_i^t/P_i^t = Q_i^t.

This example generalizes for nominal values relative to real values across different years for which P, a price index comparing the general price level across years, is available. Consider a nominal value (say of an hourly wage rate) in each different year t. To derive a real-value series from a series of nominal values in different years, divide nominal value in each year by P^t, the price index in that year. By definition then: This article does not cite its references or sources. ...

real value in year t = nominal value in year t/P^t.

The generalization to a commodity bundle from the single-good illustration above is to a bundle of quantities of different commodities and different years. This has practical use, because price indexes and the National Income and Product Accounts are constructed from such bundles of commodities and their respective prices. This article does not cite its references or sources. ... National Income and Product Accounts (NIPA) use double entry accounting to report the monetary value and sources of output produced in a country and the distribution of incomes that production generates. ...

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 = P₁^t x Q₁^t + . . . + P_n^t x Q_n^t.

From the above:

P_t = the value of a price index in year t.

The nominal value of the bundle over a series of years and corresponding P^t define:

real value of the bundle in year t = Q^t = nominal value of the bundle in year t/P^t.

Alternatively, multiplying both sides by P^t:

nominal value of the bundle in year t = P^t x Q^t.

So, every nominal value can be dichotomized into a price-level part and a real part. The real part Q^t is an index of the quantities in the bundle. A dichotomy is a division into two non-overlapping or mutually exclusive and jointly exhaustive parts. ...

An illustration of a nominal-value sum is nominal GDP. An illustration of a real-value sum (or quotient) is real GDP. National Income and Product Accounts (NIPA) use double entry accounting to report the monetary value and sources of output produced in a country and the distribution of incomes that production generates. ... In economics, the gross domestic product (GDP) is a measure of the amount of the economic production of a particular territory in financial capital terms during a specific time period. ...

Uses and examples of nominal and real values

Nominal values -- such as nominal wages or (nominal) gross domestic product -- refer to amounts that are paid or earned in money terms. In the illustration of the previous section, for a single good with a nominal value, the nominal value of the good was divided by its unit price to calculate its real value, namely the quantity of the good. The same general method applies for calculation of other real values, except that a price index is used instead of the price of a single commodity. Real values (such as real wages or real gross domestic product) can be derived by dividing the relevant nominal value (money wages or nominal GDP) by the appropriate price index. For consumers, a relevant bundle of goods is that used to compute the Consumer Price Index. So, for wage earners as consumers a relevant real wage is the nominal wage (after-tax) divided by the CPI. A relevant divisor of nominal GDP is the GDP price index. GDP redirects here. ... For other uses, see Money (disambiguation). ... This article does not cite its references or sources. ... It has been suggested that this article be split into multiple articles accessible from a disambiguation page. ...

Real values represent the purchasing power of nominal values in a given period, including wages, interest, 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 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 base-year price-index 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 [base-year] 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 price-index values in other years. Purchasing Power- the amount of value of a good/services compared to the amount paid. ... The term Constant dollars refers to a metric for valuing the price of something over time, without that metric changing due to inflation or deflation. ... National Income and Product Accounts (NIPA) use double entry accounting to report the monetary value and sources of output produced in a country and the distribution of incomes that production generates. ... In economics, the GDP deflator (implicit price deflator for GDP) is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. ... This article does not cite any references or sources. ...

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. For other persons named Adam Smith, see Adam Smith (disambiguation). ...

Real and nominal interest rates

• Real interest rates are measured as the difference between nominal interest rates and the rate of inflation.
  • 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.

The relationship above is approximate only. The actual relationship is: (1+IR_N)=(1+IR_R)(1+I), where: IR_N is the nominal interest rate, IR_R is the real interest rate, and I is the inflation rate

See also

• Aggregation problem
• Classical dichotomy
• Cost-of-living index
• Deflation
• Index (economics)
• Inflation
• Money illusion
• National accounts
• Neutrality of money
• Numéraire
• Real interest rate
• Inflation accounting

The aggregation problem in economics refers to the difficulty of treating empirical or theoretical aggregates as though they reacted analogously to the behavior of optimizing individual agents as described in general microeconomic theory (Fisher, 1987, p. ... The classical dichotomy is the division between real money; which is measured in physical terms and is typically a better indicator of money value due to its stability, and nominal money; which is measured in terms of a currency and hence is susceptible to inflation. ... A cost-of-living index measures the cost of goods and services, typically over time. ... Deflation (economics) Deflation (data compression) Deflation is the removal of loose soil by eolian (wind) processes This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ... In economics and finance an index (for example a price index, a stockmarket index) is a benchmark of activity, performance or any evolution in general. ... Money illusion refers to the tendency of people to think of currency in nominal, rather than real, terms. ... Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. ... In economics, neutrality of money occurs whenever a change in the stock of money affects only nominal variables in the economy such as prices, wages and exchange rates. ... This article does not cite any references or sources. ... The real interest rate is the interest rate charged to a risk free borrower, minus the inflation rate. ... Inflation accounting is a financial reporting process that considers the effects of inflation on financial statements. ...

References

• W.E. Diewert, "Index numbers," The New Palgrave: A Dictionary of Economics, v. 2, pp. 767-80
• R. O'Donnell (1987). "real and nominal quantities," The New Palgrave: A Dictionary of Economics, v. 4, pp. 97-98 (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. 1-45.
• D. Usher (1987). "real income," The New Palgrave: A Dictionary of Economics, v. 4, pp. 104-05