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Real vs. Nominal

Rosalie
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2/8/2016 6:10:07 PM
Posted: 10 months ago
Nominal Interest Rates vs. Real Interest Rates

Assume we purchase a 1 year bond for face esteem that pays 6% toward the end of the year. We pay $100 toward the start of the year and get $106 toward the end of the year. In this manner the security pays a loan fee of 6%. This 6% is the ostensible loan cost, as we have not represented swelling. At whatever point individuals discuss the loan cost they're discussing the ostensible financing cost, unless they state generally.

Presently assume the swelling rate is 3% for that year. We can purchase a wicker container of products today and it will cost $100, or we can purchase that crate one year from now and it will cost $103.

On the off chance that we purchase the security with a 6% ostensible financing cost for $100, offer it following a year and get $106, purchase a wicker container of products for $103, we will have $3 left over. So subsequent to considering in swelling, our $100 security will win us $3 in wage; a genuine loan fee of 3%. The relationship between the ostensible loan cost, expansion, and the genuine financing cost is depicted by the Fisher Equation.

Real Interest Rate = Nominal Interest Rate - Inflation

Nominal GDP Growth vs. Real GDP Growth

Gross domestic product, or Gross Domestic Product is the estimation of the considerable number of merchandise and administrations delivered in a nation. The Nominal Gross Domestic Product measures the estimation of the considerable number of merchandise and administrations created communicated in current costs. Then again, Real Gross Domestic Product measures the estimation of the considerable number of merchandise and administrations created communicated in the costs of some base year. An illustration:

Assume in the year 2000, the economy of a nation created $100 billion worth of merchandise and administrations in view of year 2000 costs.

Since we're utilizing 2000 as a premise year, the ostensible and genuine GDP are the same. In the year 2001, the economy delivered $110B worth of merchandise and administrations taking into account year 2001 costs. Those same products and administrations are rather esteemed at $105B if year 2000 costs are utilized. At that point:

Year 2000 Nominal GDP = $100B, Real GDP = $100B

Year 2001 Nominal GDP = $110B, Real GDP = $105B

Ostensible GDP Growth Rate = 10%

Genuine GDP Growth Rate = 5%

By and by, if expansion is sure, then the Nominal GDP and Nominal GDP Growth Rate will be not exactly their ostensible partners. The contrast between Nominal GDP and Real GDP is utilized to gauge swelling in a measurement called The GDP Deflator.

Nominal Wages vs. Real Wages

These work similarly as the ostensible financing cost. So if your ostensible compensation is $50,000 in 2002 and $55,000 in 2003, yet the value level has ascended by 12%, then your $55,000 in 2003 purchases what $49,107 would have in 2002, so your genuine pay has gone done. You can compute a genuine compensation as far as some base year by the accompanying--Real Wage = Nominal Wage / 1 + % Increase in Prices Since Base Year
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16
Rosalie
Posts: 4,605
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2/8/2016 8:32:14 PM
Posted: 10 months ago
At 2/8/2016 8:31:02 PM, ResponsiblyIrresponsible wrote:
Cool story, bro.

-.-
" We need more videos of cat's playing the piano on the internet" - My art professor.

"Criticism is easier to take when you realize that the only people who aren't criticized are those who don't take risks." - Donald Trump

Officially Mrs. 16Kadams 8-30-16
ResponsiblyIrresponsible
Posts: 12,398
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2/8/2016 8:38:13 PM
Posted: 10 months ago
At 2/8/2016 8:32:14 PM, Rosalie wrote:
At 2/8/2016 8:31:02 PM, ResponsiblyIrresponsible wrote:
Cool story, bro.

-.-

The problem isn't that this is really basic stuff -- everyone has to start somewhere, and heaven knows most people on DDO don't even know this stuff (i.e., they'll reason in terms of a 0 percent nominal rate when it's convenient, and then boast about a positive real rate due to a "constant rate of deflation," without explaining how in the world they actually accomplish that).

The real problem is that people will sort of glaze over this thread, as I have, without actually knowing the difference between nominal and real -- they won't know, for instance, what money illusion is, but will *insist* that these "Keynesians" ideas are just big government Illimunati conspiracies to keep the small guy down: that doesn't exactly require any rigorous understanding of the actual, underlying issues.

So this thread is a good thing.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
Posts: 12,398
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2/8/2016 9:22:34 PM
Posted: 10 months ago
One more interesting thing: levels are additive, which means that growth rates are multiplicative.

So the level of NGDP -- x billion -- is:

NGDP = P * Y

where P is the base year price and Y is real output can be rewritten (you can think of it as log-linearization) as:

NGDP growth = P growth + Y growth

OR

NGDP growth = inflation rate + RGDP growth

The same can be done to a Cobb-Douglas production function:

Y = A * K ^(1-a) * L^a

ln Y = ln A + ln K ^(1-a) + ln L^a

Or, via properties of logs:

ln Y = ln A + (1-a) ln K + a ln L

Neat stuff.
~ResponsiblyIrresponsible

DDO's Economics Messiah