Nominal versus Real: Adjusting for Inflation

If prices double while production stays the same, nominal GDP doubles even though nobody is any better off. Economists therefore distinguish nominal values, measured in current prices, from real values, adjusted for changes in the price level. Real GDP is calculated using the prices of a fixed base year, or a chain of recent years, so that growth reflects more goods and services rather than higher price tags. The same logic applies to wages: a 5 percent raise during 8 percent inflation is a real pay cut.

Price indexes such as the consumer price index track the cost of a typical basket of goods, though choosing that basket involves judgment and changes as habits change. Without inflation adjustment, comparisons across decades, or between countries with very different inflation rates, would be badly misleading. That is why serious economic claims about growth almost always refer to real figures.