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Real versus nominal value
In economics, the nominal values of something are its money values in different years. Real values adjust for differences in the price level in those years. Examples include a bundle of commodities, such as gross domestic product, and income. For a series of nominal values in successive years, different values could be because of differences in the price level, an index of prices. But nominal values do not specify how much of the difference is from changes in the price level. Real values remove this ambiguity. Real values convert the nominal values as if prices were constant in each year of the series. Any differences in real values are then attributed to differences in quantities of the bundle or differences in the amount of goods that the money incomes could buy in each year. Thus, the real values index the quantities of the commodity bundle or the purchasing power of the money incomes for each year in the series. The nominal/real value distinction can apply not only to time-series data, as above, but to cross-section data varying by region or householder characteristics. The relation of nomimal/real values and price/quantity (P/Q) indexes is defined by the following: nominal value = P•real value = P•Q.
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