• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 2. A Beginner's Guide: Understan... > Nominal Dollars Versus Real Dollars ...

Nominal Dollars Versus Real Dollars (Also Known as Current Dollars Versus Constant Dollars)

Anything measured in dollars can be looked at in two ways. Nominal dollars (also referred to as current dollars) represents the actual amount of money spent or earned over a period of time. You'll see stories mentioning how American factory workers received total pay hikes of $500 million, or a 5% increase, in the last 12 months. Or perhaps you read that company A reported income from sales of sweaters climbed to $220 million that year, up from $200 million the year before, or a jump of 10%. These figures are based in nominal dollars.

However, nominal (or current) dollars gives you only part of the story. What's missing is how inflation can distort such numbers. Let's go back to the example of the earnings of factory workers. They might have seen their pay jump by 5% in nominal terms, but before anyone celebrates, someone should ask this question: “What if the price of goods and services (i.e., inflation) rose by 4% during that same period?” In that case, the wages of these workers rose by a less-than-impressive 1% in real (or constant) dollars. In other words, the actual increase in purchasing power these workers gained from their pay hike was far smaller than 5%.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint