In statistics, there are many terms used that can be confusing or used interchangeably. The two terms that you will find almost anywhere are the real and nominal values of a product or a service. People out there will confuse them by definition and even use it. In this brief, we are going to state 10 noticeable differences between the real and nominal value of products or services.
What are the Differences between Nominal value and real value?
1. Definitions- The nominal value is calculated in terms of the money. This means that the nominal value of an item is its value in monetary terms. On the other hand, the real value of an item is its value relative to another item. What this simply means is that the real value of an item is its value relative to another item, good, service or even a bundle of items.
2. Example- a good example of nominal value is. A Toyota Camry today costs about $18,000.This states the real monetary value of the vehicle. On the other hand, the real value example can be: a Toyota Camry costs twice as much as a Nissan Juke. The second example states the cost of Toyota Camry in reference to the cost of another vehicle-Nissan Camry.
3. The real value can as well be known as Relative value. The main reason for this is because the value of one item is stated relative to another. This is why you will find people referring to the real price of an item as its relative price. When you hear reports that the relative price of Televisions has dropped in the last year, you should always know that it’s the price of Televisions relative to another electronic especially alternatives such as Computers.
4. The real value of an item can decrease even when the nominal prices are going up. This clearly shows that there’s no clear relationship between the two. The relative price of an item is determined directly by the nominal value of another item. So if you are comparing two items let’s say a computer and a TV set, when the nominal price of one item changes, the relative price of the other will equally be affected.
5. Inflation affects the real value of items. Unlike nominal prices, the relative price of an item can be affected by inflation. This is actually the reason why the relative price can drop even when the nominal price is still high.
6. Real value is nominal price adjusted for inflation. This is how most of the dictionaries will define it. Remember we said the real price is affected directly by the inflation. So if the nominal price is adjusted for inflation, it becomes real value. Real value formulas will suggest that the real value of an item will be as a result of factoring out all the price change effects.
7. The real value of an item can as well be gotten by comparing the prices of an item as percentages of hourly wages across time. This is a little complicated but works as a perfect difference between the nominal value and the real value. The nominal value cannot be stated as a percentage while the real value can.
8. Nominal value is less important. I am not trying to say that we don’t need the nominal value of goods and services. What I am trying to mean is that most data is collected in nominal terms but what matters the most is the real value. Though, to other professionals unlike economists, the nominal value is the most important because it shows the exact monetary value of a product or a service.
9. Many people will call a nominal price a sticker price. This is the price that you will find on clothes in the supermarkets and clothe stores. It has not been adjusted for any changes in the market. This is what most people will understand but in statistics, the majority of other people will better understand and want to use real values or better known as Relative prices.
10. Real values or relative values can be presented in percentages, unlike nominal value. We already stated that real value can be stated as a percentage. Though, this is not the case with nominal prices because they are not relative to anything else.
The above are the most common differences between the two terms. You will find them being used to measuring national GDP and also used in statistics to show the values and public spending. The differences are not limited because there are many. Talk to the users and ask about their derivation formulas.