4.6.3—Nominal vs real data

Nominal income or output is measured in the prices of the period. Real data adjust for price changes, so they are better for comparing purchasing power or quantities across time.

A nominal increase can coexist with a real decrease if prices rise faster. The adjustment uses a price index or deflator; the exact formula depends on the index convention, but the economic question is always whether buying power or physical output changed.

A wage rises from 2,000 to 2,080 while prices rise 6%. Nominal pay is up 4%, but real purchasing power has fallen because the price increase is larger.

Real does not mean “inflation-free in every household”. It means adjusted using a chosen index, so the basket and base period still matter.