2.4 nominal & real variables

• Nominal variables are measured in current prices

  • the prices ruling at the time of measurement.
• Real variables adjust nominal values for changes in the price level, using a price index like the CPI to account for inflation. Real variables reflect the purchasing power of money over time.
• real price = (Nominal price / CPI or RPI) x 100
• Real prices provide a better comparison of economic values across time periods.
• Money illusion refers to the tendency to think in terms of nominal values rather than real values. This can cause people to perceive changes in prices or wages inaccurately.
• The purchasing power of money is the quantity of goods that can be bought for a unit of currency
• When inflation rises, the purchasing power of money falls, meaning each £1 buys fewer goods.