Distinguish nominal changes from price-adjusted changes
The idea
Nominal values use current prices; real values adjust for the price level using a stated base.
Step by step
- Nominal values use current prices; real values adjust for the price level using a stated base.
- With a base-100 price index, real value = nominal value ÷ (index/100).
- Use consistent bases and units; an aggregate real increase does not imply every household benefits.
Example
Nominal output is 120 money units and the base-100 price index is 120. What is real output in base-year units?
Answer
100 base-year units
Real output = 120 ÷ 1.20 = 100.
Start quiz5 questions
5 questionsTry it together
Invent two years of nominal output and a base-100 price index. Calculate real output in both years.
Share practice
