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Real Value

Reviewed by Anjaneyulu | Updated on Sep 30, 2020

Catalogue

Introduction

The real value is an inflation-adjusted nominal value. The actual value is obtained by extracting the impact of price level shifts from the nominal value of time-series' results to get a real picture of economic trends.

Importance of Real Value

Real values are more critical for economic measures, such as gross domestic product (GDP) and personal income as they help in determining how inflation causes increase over time.

The real value is obtained by removing the effect of price level changes from the nominal value of the data of goods, service or time series to get a more accurate picture of economic trends. A deflator changes the nominal value of the time-series results, such as gross domestic product and wages, to extract their actual values.

How to Measure It?

The real value is measurable fairly easily. A company has to pay for labour, raw materials, transportation, marketing, and product development costs that allow it to measure the real value of the product.

Quality perceived is not as straightforward as many variables that play a role in it are not observable or measurable specifically. Factors such as scarcity, marketing efforts, novelty, and associations with brands offer perceived value.

Two companies can sell similar cars, for example, which cost the same amount to produce, giving them identical real values. However, one car will likely have a higher perceived value if its maker has a reputation for reliability.

Real Value vs Nominal Value

In finance, the nominal value of certain things, through different years, can be its money value. Real values account for price-level differences in those years. Examples include a product package, such as a Gross Domestic Product, and sales. There can be different values for a series of nominal values in successive years because of price level differences.

However, nominal values do not specify how much of the difference lies in price level changes. Real values do away with this ambiguity. Real values convert nominal values as if the prices in each year of the sequence were constant.

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