- Nominal
- A nominal figure is measured in the actual prices that existed at the time it was recorded.
- Real
- A real figure is the same figure after it has been adjusted for inflation.
Another way to see itReading an economic figure without allowing for inflation is like looking through a telescope and guessing a distance: unless you know how strong the lens is, you cannot judge it.
When prices rise, the same money buys less
Inflation is a rise in the general level of prices. When prices rise, a pound buys fewer goods than it did before, so the same sum of money is not the same amount of spending power in one year as it was in another. That is why a figure from one year cannot be set beside a figure from another and read straight off. The two are counted in units of different size.
Adjusting means restating both figures in one year's prices
To compare two years, you pick one year and express both figures in that year's prices. That chosen year is the base year: the year whose prices are used to work out the real figure. Once both years are stated in the same prices, the difference between them is a difference in what the money actually bought, rather than a difference in the prices it was spent on.
Check yourself
Prices rose over the ten years between an old pay slip and a new one. What does that do to a comparison of the two cash figures?
Can you think of an example before you look?
A wage on an old pay slip reads £18,000 and a newer one reads £24,000. The cash figure has risen by a third. But if prices rose by a half over the same years, the £24,000 buys less than the £18,000 did, so that wage rose in nominal terms and fell in real terms.
A year in the label tells you which kind of figure you have
A real figure is labelled with the year whose prices it is measured in, as in "at 2015 prices". A nominal figure carries only the year the money changed hands. Both give you a year, so the year alone settles nothing. What matters is whether the year names the prices or the payment.
Check yourself
A wage is given as "£18,000 a year, at 2015 prices". Which kind of figure is it?
Doesn't a bigger number mean a bigger wage?
Only if prices held still, and they rarely do. Pay up 3 per cent in a year when prices rose 5 per cent is a rise in nominal terms and a fall in real terms: more money arrived and it bought less. Exam questions on this almost always hand you a pair that moves in opposite directions, so work out both before you answer.
Say which kind of figure you mean, every time. "Wages rose" earns nothing by itself; "wages rose in nominal terms and fell in real terms" is the answer. And where a question hands you a figure at 2015 prices, it has already told you the figure is real, so do not adjust it again.
Check yourself
Three of these are real figures. Which one is nominal?
Exam question
Pay rose 3 per cent over a year in which prices rose 5 per cent. State what happened to that pay in nominal terms and in real terms. [2]
It rose in nominal terms and fell in real terms.
One mark for the nominal direction, one for the real. The cash figure went up 3 per cent, and what it bought fell, because the prices it was spent on went up faster.
A nominal figure is measured in the prices of its own time. Because prices rise, pounds from different years are units of different size, so two nominal figures cannot be compared directly. A real figure restates both in the prices of one base year, and is labelled with that year. Pay and prices can rise together at different speeds, so one figure can rise in nominal terms and fall in real terms at once.