Whats the Difference Between Nominal and Real?
[Q:] I’m learning economics and I keep hearing the terms nominal and real all the time to describe things like interest rates. What’s the difference between nominal and real? [A:]Great question! Generally a real variable, such as the real interest rate, is one where the effects of inflation have been factored in. A nominal variable is one where the effects of inflation have not been accounted for. A few examples illustrate the difference: 1. Nominal Interest Rates vs. Real Interest Rates Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We pay $100 at the beginning of the year and get $106 at the end of the year. Thus the bond pays an interest rate of 6%. This 6% is the nominal interest rate, as we have not accounted for inflation. Whenever people speak of the interest rate they’re talking about the nominal interest rate, unless they state otherwise. Now suppose the inflation rate is 3% for that year. We
What’s the Difference Between Nominal and Real? Wednesday September 6, 2006 I’ve been asked this question at least a half-dozen times over e-mail this week. I guess that can only mean that economics classes are starting up again and this topic is starting to be presented. If you’d like to learn the difference between nominal and real economic variables, see: What’s the Difference Between Nominal and Real? More about: ???–>Comments (0)See All PostsShare Prev