Real rate: Difference between revisions
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A real terms rate - often abbreviated to 'real rate- is one which has been restated to exclude the effects of inflation. | A real terms rate - often abbreviated to 'real rate' - is one which has been restated to exclude the effects of inflation. | ||
Items, such as rates, which have ''not'' been adjusted for inflation are often known as 'money terms' rates, 'nominal terms' rates, or 'nominal' rates. | |||
Real rate = ( ( 1 + Nominal rate ) / ( 1 + Inflation rate ) ) - 1 | The relationship between the Real terms rate, the Nominal rate and the Inflation rate is: | ||
Real rate = ( (1 + Nominal rate) / (1 + Inflation rate) ) - 1 | |||
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The Real rate of return is: | The Real rate of return is: | ||
= ( 1.06 / 1.03 ) - 1 | = (1.06 / 1.03) - 1 | ||
= 0.0291 | = 0.0291 | ||
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== See also == | == See also == | ||
* [[Fisher Effect]] | * [[Fisher Effect]] | ||
* [[Inflation]] | |||
* [[Nominal rate]] | * [[Nominal rate]] | ||
* [[PCE inflation]] | |||
* [[Real]] | * [[Real]] | ||
[[Category:The_business_context]] | |||
Latest revision as of 20:13, 20 December 2023
A real terms rate - often abbreviated to 'real rate' - is one which has been restated to exclude the effects of inflation.
Items, such as rates, which have not been adjusted for inflation are often known as 'money terms' rates, 'nominal terms' rates, or 'nominal' rates.
The relationship between the Real terms rate, the Nominal rate and the Inflation rate is:
Real rate = ( (1 + Nominal rate) / (1 + Inflation rate) ) - 1
Example
Nominal rate of return = 6% (0.06).
Inflation rate = 3% (0.03).
The Real rate of return is:
= (1.06 / 1.03) - 1
= 0.0291
= 2.91%.
