What is the ‘Real Value’
The real value is nominal value adjusted for inflation. The real value is obtained by removing the effect of price level changes from the nominal value of time-series data, so as to obtain a truer picture of economic trends. The nominal value of time-series data such as gross domestic product and incomes is adjusted by a deflator to derive their real values.
Explaining ‘Real Value’
Real values are more important than nominal values for economic measures such as GDP and personal incomes because they help ascertain the extent to which increases over time are driven by inflation and what is driven by actual growth.
For example, if personal income is $50,000 year 1 and $52,000 in year 2, but the rate of inflation is 3%, then the nominal growth rate of income is 4%, while the real growth rate is 1%.
In the U.S., the Bureau of Economic Analysis maintains the GDP Deflator that is used to compute the real rate of economic growth. The Deflator uses 2005 as the base year, which means that it is set to 100 for 2005, with other years reported relative to the 2005 dollar.
Further Reading
- The real value of China's stock market – www.sciencedirect.com [PDF]
- The real value of online communities – books.google.com [PDF]
- Financial structure and economic development – www.journals.uchicago.edu [PDF]
- Financial architecture and economic performance: international evidence – www.sciencedirect.com [PDF]
- The aftermath of financial crises – pubs.aeaweb.org [PDF]
- Capabilities as real options – pubsonline.informs.org [PDF]
- Why does financial sector growth crowd out real economic growth? – papers.ssrn.com [PDF]
- Banking in the Theory of Finance – www.sciencedirect.com [PDF]
- Inflation, financial markets and long-run real activity – www.sciencedirect.com [PDF]
