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4.6.3 distinction between money values (nominal) and real data

4.6.3 distinction between money values (nominal) and real data

Nominal and real values

Definition

Nominal (money) value: a value measured at the prices of the day, unadjusted for inflation.

Real value: a nominal value adjusted to remove price changes, so it is expressed at constant base-year prices and can be compared over time.

Money versus real

  1. A money figure can rise simply because prices rose, even when the quantity bought is unchanged.
  2. A real figure strips out those price changes, revealing the genuine change in purchasing power.
  3. So converting nominal to real allows a meaningful comparison over time.
Key Idea
  • Nominal figures can rise simply because prices rise.
  • Real figures show the genuine change in quantity or purchasing power.

The conversion method

  1. A price index shows how far prices have moved since the base year.
  2. Take the nominal value, divide by the price index, then scale back up by 100.
  3. The 100 appears because the base-year index itself equals 100.
  4. The result is expressed at base-year, constant prices.
Real value=Nominal valuePrice index×100 \text{Real value} = \dfrac{\text{Nominal value}}{\text{Price index}} \times 100 Real value=Price indexNominal value​×100
Example
  • A worker earns a nominal income of £26,000 when the price index is 130 (base year = 100).
  • Deflate the £26,000 back to base-year prices as follows.
Real value=26 000130×100=20 000 \text{Real value} = \dfrac{26\,000}{130} \times 100 = 20\,000 Real value=13026000​×100=20000
  • So the real income is £20,000 at base-year prices, well below the £26,000 headline.
  • A nominal wage rising 5% while prices rise 3% is a real rise of only about 2%, so the pay rise buys less than it looks.

Why it matters

  1. Comparing money figures over time can mislead when prices have changed.
  2. Real values remove the effect of changing prices, so they isolate real growth.
  3. So real GDP and real wages are used for genuine comparison, not the money figures.
Exam technique
  • Deflate nominal figures with a price index before comparing them.
  • Compare real values across time, not nominal ones.
Common Mistake
  • Do not read a rise in money values as a real increase.
  • Adjust for inflation to find the real change.
Self review
  • Define a nominal value.
  • Define a real value.
  • Convert a nominal income of £26,000 to a real value when the price index is 130.
  • Why can money figures mislead over time?
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A nominal value is measured at the prices of the day and has not been adjusted for inflation. It is also called a money value or current-price value.

A real value has been adjusted to remove the effect of price changes. It is expressed at constant base-year prices, allowing meaningful comparisons of purchasing power or output over time.

A nominal value can rise simply because prices have risen. A real value reveals whether the underlying quantity or purchasing power has genuinely changed.

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What can happen to a nominal money figure when prices rise but the quantity bought is unchanged?

4.6.3 distinction between money values (nominal) and real data Revision Guide

  1. Intl A Level
  2. /Economics
  3. /4.6.3 distinction between money values (nominal) and real data

Revision notes for CIE Intl A Level Economics 4.6.3 distinction between money values (nominal) and real data: explanations and worked examples.