Economics, 3rd Edition

Real versus Nominal Values

Economists deal with numbers but it is important to have some understanding of the numbers we might 

happen to be working with. Distinguishing between real and nominal values is extremely important. 

A simple way to understand the difference between nominal and real values is to remember that nominal 

values are expressed in money terms whereas real values are expressed as quantities. Typically, we will 

look at values which are affected by price movements over time. For example, if a firm was to tell you that 

it had sold 

€1 million worth of extra products over the last year (2014) what does that tell you? The answer 

is: not very much! If the firm sold 

€10 million worth of goods the year before (2013) you might be tempted 

to think that now selling 

€11 million worth is a ‘good’ thing and indeed, it might be.

Now assume that you know a little bit more about the situation of the firm in our example. Assume 

that the firm sold 10 million units in 2013, each priced at 

€1. Making a judgement on the performance of 

the firm in 2014 requires we know a little bit more about the extra 

€1 million worth of sales – the nominal 

value. If the price of the goods sold in 2014 stayed at 

€1 then we know that the firm sold an extra 1 million 

units that year – a 10 per cent increase in sales volumes, which we might conclude is a creditable perfor-

mance. However, would you come to the same conclusion if you discovered that the price they sold their 

products at in 2014 was 

€10, meaning they only sold an extra 100,000 units in that year? Now the increase 

in sales is only 1 per cent – not such a good performance. The performance of the firm is largely due to 

the change in price not the amount of goods sold. In this case, nominal sales rose by 

€1 million but real 

sales rose by 100,000 units.

Real values, therefore, take into account price changes over time or the adjusting factors such as the 

seasons, whereas nominal values don’t take account of these adjusting factors. For this reason you might 

see nominal values referred to as current prices whereas real values might be referred to as constant 

prices.

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