Real Value

Prices rise over time, so the same amount of money buys less in the future than it does today. Real value removes the effect of rising prices and expresses amounts in terms of purchasing power.

For example, suppose prices rise by an average of 3% a year. In ten years, 1,000 will buy only about as much as 744 buys today. The nominal amount is still 1,000, but its real value in today's money is about 744.

Real values are essential when comparing figures across time. A country's economy that grew from 100 billion to 110 billion in nominal terms may not have grown at all in real terms if prices rose by 10% over the same period.

The same logic applies to returns. If your savings earn 5% while inflation is 3%, your nominal return is 5% but your real return is only about 2%. Thinking in real terms is the best way to judge whether savings, wages or investments are truly growing.

Note: Inflation-adjusted value means the same thing as real value. Both describe an amount expressed in constant purchasing power.