Nominal Value
What is Nominal Value?
Nominal values are measured in the prices of the period when they occurred, so they mix changes in quantity together with changes in prices.
A nominal figure is what a transaction was worth in the money of its own time, with no correction for inflation, which is why nominal wages, nominal GDP and nominal interest rates all overstate real gains when prices are rising. Nominal GDP can grow in a year when the country produced less, if prices rose faster than output fell. Nominal values are not wrong; they are the actual amounts paid, and they are the correct measure for anything settled in current money, such as a loan payment or a tax bill. Trouble starts when nominal figures from different periods get compared directly, because part of the difference is nothing but the change in the price level. Dividing by a price index converts them to real terms and makes the comparison meaningful.
Nominal Value: a worked example
Suppose a worker earned 40,000 dollars in a base year when the price index was 100, and earns 48,000 in a later year when the index is 125. Nominal pay rose (48,000 - 40,000) ÷ 40,000 = 20 percent. Real pay is 48,000 ÷ (125 ÷ 100) = 38,400 dollars in base-year prices, which is 4 percent below the original 40,000. The raise is real money and the worker does receive 48,000 dollars, but it buys less than the earlier salary did. Comparing only the nominal figures would report a 20 percent gain where purchasing power actually fell.
The mistake students make with nominal value
Students hear that nominal figures are not adjusted for inflation and conclude they are inaccurate or useless. Nominal amounts are exactly what changed hands and are the right basis for contracts, debts and taxes. The real error is comparing nominal amounts from different periods and treating the difference as a change in well-being. Any comparison across time needs deflating first, because part of the gap is only the price level.
Nominal Value questions
What is the difference between nominal and real values?
A nominal value is measured in the prices of the period when it occurred, while a real value is adjusted so every period is expressed in the prices of one base year. The difference between them is entirely the change in the price level. Real figures answer questions about quantity and purchasing power; nominal figures answer questions about money actually paid.
Can nominal GDP rise while real GDP falls?
Yes, nominal GDP rises while real GDP falls whenever prices increase faster than output declines. A 5 percent rise in the price level combined with a 2 percent drop in production still leaves nominal GDP roughly 3 percent higher. That possibility is exactly why output comparisons across years use real GDP.
Is the interest rate on a loan nominal or real?
The rate quoted on a loan is nominal, since it is stated in current money with no correction for inflation. The real rate subtracts expected inflation from it, and that is what tells a borrower the cost in terms of goods. When inflation runs above the nominal rate, the real rate is negative.
Formula / Example
Related terms
Common comparisons
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