Unit 2 Macro: Revision on Real Economic Data

Why do economists often find ‘real’ figures to be of more use than ‘nominal’ or ‘money figures?

In economics we often make an important distinction between nominal (or money) values and real values.

* Nominal values of something are its money values at different points in time.
* Real values adjust for differences in the price level over time.

Real values convert the nominal values for an economic data series as if prices were constant in each year of the series. Any differences in real values are then attributed to differences in quantities of amount of goods that the money incomes could buy in each year

Real values for many data series make it easier to make more meaninful comparisons over time.

For example the money value of the national output of goods and services (money GDP) might have risen by 5% during a year. But over the same period the rate of price inflation might have been 3%. So more than half of the increase in money GDP can be accounted for by the effects of inflation. In real terms, GDP has increased by 2%.

Our chart below tracks two data series

(1) The quarterly value of money GDP for the UK (i.e. national output expressed at current prices)
(2) The quarterly value of real GDP (data adjusted for inflation, expressed at constant prices)

Another example, my money wage might have increased over one year from £10 an hour to £10.50 an hour - a rise in my money wage rate of 5%. But if consumer prices have risen by 5% over the same period, then my real wage has remained the same. The money wage increase has been wiped out by the effects of inflation. In real terms, I am no better off at the end of the year.

Sometimes people confuse a change in money values with a change in real values - wages are a good example of this - economists have a term to describe this, they call it money illusion. Money illusion refers to the tendency of people to think of currency in nominal, rather than real, terms

What to look for in a data response question

If you see a data series expressed “at constant prices” then you can be sure that the economic data has been adjusted for changes in prices. The data has been converted from nominal to real terms.