Nominal prices merely reflect the actual current price or value of a statistic. A nominal statistics means it has been unadjusted.
- e.g. nominal prices ignore the effects of inflation.
- Nominal figures also exclude other adjustments such as seasonal adjustment.
- e.g. Nominal GDP shows the monetary value of GDP.
- Real GDP shows the nominal value minus inflation.
- See: Why should nominal GDP be adjusted for the effects of inflation?
For example, if UK GDP rose from £1,242bn to £1,442 bn. That represent a 16% increase in GDP.
However, if the price level rose by 13%, then the real GDP is nominal GDP(16%) – inflation (13%) = 3%
Real figures are said to give a more accurate reflection of actual living standards.
If you have inflation of 100%, nominal GDP will double in a year. But, this nominal figure is misleading. Just because prices have doubled doesn’t mean you have doubled living standards.
Nominal and Real House Prices
This graph shows both real and nominal house prices.
- In 1987, nominal house prices were just over £40,000. By 2008 house prices had increased to £180,000.
- But, taking into account inflation. A £40,000 house in 1987 was actually worth £90,000 in 2008.
- Nominal house prices roughly increased four fold. (400%)
- Real house prices roughly doubled (200%)