A value expressed in real terms has been adjusted for price changes, allowing amounts from different periods to be compared on a common basis. A nominal value is the money amount before that adjustment.
For wages or savings, the distinction helps explain purchasing power: the goods and services the money can buy. For economic output, it separates changes in production from changes in prices.
A pay example
Suppose hourly pay rises from $20 to $22 over a year, a nominal increase of 10%. If the relevant consumer price index also rises by 10% over the same period, the new wage has the same purchasing power per hour as the old one.
Expressed in the previous year’s prices, $22 ÷ 1.10 = $20. Real hourly pay has not increased. This calculation does not establish the worker’s total income or wealth, which also depend on hours worked, taxes, assets, debts and other factors.
How the price adjustment works
A price index tracks prices relative to a reference period. To express a current money amount in a chosen base period’s prices:
Real value = nominal value × (base-period price index ÷ current-period price index).
If the base-period index is 100 and the current index is 110, a current amount of $220 becomes $200 in base-period dollars. The U.S. Bureau of Labor Statistics explains this conversion to constant dollars.
The base period must be stated. Nominal and real numbers can coincide in the period used to scale the series, even if prices changed before or after it.
Real growth uses growth factors
Subtracting inflation from nominal growth gives an approximation. For an exact two-period calculation, divide the nominal growth factor by the price growth factor, then subtract one.
Real growth = (1 + nominal growth) ÷ (1 + price growth) − 1.
Enter rates as decimals, such as 0.04 for 4%, and multiply the result by 100 to express it as a percentage.
For example, if company revenue rises by 4% and an appropriate output price index rises by 2%, the inflation-adjusted increase is (1.04 ÷ 1.02 − 1) × 100, or about 1.96%. The simple subtraction of 4% minus 2% is close, but not exact.
Savings in real terms
Suppose a fictional account pays an effective return of 4% over one year on $10,000, with no additional deposits or withdrawals. The closing nominal balance is $10,400.
If consumer prices rise by 3.5% over that same year, the balance is worth $10,400 ÷ 1.035, or about $10,048.31 in starting-year prices. Its real gain is approximately 0.48%, before taxes and fees.
Nominal GDP and real GDP
Gross domestic product, or GDP, measures the value of final goods and services produced within an economy during a period, usually a quarter or year. It is a flow of production, rather than a stock of wealth held on a particular date.
Nominal GDP uses current prices. Real GDP removes the effect of price changes to measure changes in output. The U.S. Bureau of Economic Analysis explains these measures in its GDP primer.
Imagine a fictional economy whose annual nominal GDP rises from $200 billion to $220 billion. That is 10% nominal growth. If its GDP price deflator, the price measure associated with GDP, rises by 2%, real growth is (1.10 ÷ 1.02 − 1) × 100, or about 7.84%.
The second year’s GDP is approximately $215.69 billion in first-year prices. These figures describe production during two years, not amounts held on January 1.
Which price index matters?
The index needs to match the question. A consumer price index measures prices paid by consumers; GDP uses broader production-related price measures. A general consumer inflation rate will not necessarily capture the prices relevant to a particular company’s revenue.
Households also have different spending patterns. As BLS explains, the published CPI describes average experience for its reference population and may differ from an individual’s experience.
What is money illusion?
Money illusion is the tendency to focus on nominal money amounts rather than their real value. A research paper by Eldar Shafir, Peter Diamond and Amos Tversky examines this bias.
In the pay example, treating a 10% increase as a 10% improvement in buying power would overlook the matching rise in prices. Recognizing the larger paycheck and its unchanged real hourly value are two different judgments.
Last checked and updated on November 2, 2026 by the MBN editorial team.