Real measures

Understand the idea

In a simple example, divide the current nominal amount by the price index relative to the starting period. Official national accounts can use more sophisticated chain-weighted methods as spending patterns change. The principle remains: part of a money increase may be the same goods or services costing more, rather than more activity taking place.

An example

Suppose annual income rises from J$100,000 to J$106,000, while a suitable price index rises from 100 to 104. The new income in starting-period purchasing power is J$106,000 ÷ 1.04, about J$101,923. Nominal income grew 6%, but real purchasing power grew about 1.9%. Simply subtracting 4% from 6% gives a useful approximation, not the exact calculation.

Sources

• BEA: real measures and national economic accounts

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