Real: Difference between revisions
imported>Doug Williamson (Link with Inflation page.) |
imported>Doug Williamson (Standardise appearance of page) |
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'''Example 1''' | |||
If £100 is invested for a year | |||
at a nominal rate of 10% and | at a nominal rate of 10% and | ||
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inflation is 2%, | inflation is 2%, | ||
we can say that the nominal rate is 10% | we can say that the nominal rate is 10%, | ||
but the real rate is only | but the real rate is only: | ||
= 7.84% | = ( 1.10 / 1.02 ) - 1 | ||
= 7.84% | |||
all rates being expressed as effective annual rates. | all rates being expressed as effective annual rates. | ||
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Notice how the inflation rate and the real rate compound together to produce the nominal rate | Notice how the inflation rate and the real rate compound together to produce the nominal rate. | ||
'''Example 2''' | |||
(1.02 x 1.0784) - 1 | ( 1.02 x 1.0784 ) - 1 | ||
= 10%. | = 10%. | ||
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When either the inflation rate or the real rate is low, the result is approximately the same as simply adding or subtracting rates. | When either the inflation rate or the real rate is low, the result is approximately the same as simply adding or subtracting rates. | ||
'''Example 3''' | |||
When the nominal rate is 6% | |||
and the inflation rate is 4%, | and the inflation rate is 4%, | ||
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the real rate is approximately: | the real rate is approximately: | ||
6% - 4% | = 6% - 4% | ||
= +2%. | = +2%. | ||
(Calculated more strictly, it would be (1.06/1.04) - 1 = +1.92%, all rates being effective annual rates.) | (Calculated more strictly, it would be ( 1.06 / 1.04 ) - 1 = +1.92%, all rates being effective annual rates.) | ||
'''Example 4''' | |||
When the nominal rate is 3% | |||
and the inflation rate is 4%, | and the inflation rate is 4%, | ||
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the real rate is approximately: | the real rate is approximately: | ||
3% - 4% | = 3% - 4% | ||
= -1%. | = -1%. | ||
(Calculated more strictly, it would be (1.03/1.04) - 1 = -0.96%.) | (Calculated more strictly, it would be ( 1.03 / 1.04 ) - 1 = -0.96%.) | ||
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6. | 6. | ||
''Options''. Relating to an operational decision or outcome. | ''Options''. | ||
Relating to an operational decision or outcome. | |||
7. | 7. | ||
''Economics''. Referring to the part of the total economy which excludes financial markets and financial services. | ''Economics''. | ||
Referring to the part of the total economy which excludes financial markets and financial services. | |||
Revision as of 12:22, 18 March 2015
1.
A term which has been restated to exclude the effects of inflation.
Example 1
If £100 is invested for a year
at a nominal rate of 10% and
inflation is 2%,
we can say that the nominal rate is 10%,
but the real rate is only:
= ( 1.10 / 1.02 ) - 1
= 7.84%
all rates being expressed as effective annual rates.
This is because goods which cost £100 today will cost £102 in a year's time.
Therefore only a 7.84% return has been made if we take into account the new prices of goods.
Notice how the inflation rate and the real rate compound together to produce the nominal rate.
Example 2
( 1.02 x 1.0784 ) - 1
= 10%.
When either the inflation rate or the real rate is low, the result is approximately the same as simply adding or subtracting rates.
Example 3
When the nominal rate is 6%
and the inflation rate is 4%,
the real rate is approximately:
= 6% - 4%
= +2%.
(Calculated more strictly, it would be ( 1.06 / 1.04 ) - 1 = +1.92%, all rates being effective annual rates.)
Example 4
When the nominal rate is 3%
and the inflation rate is 4%,
the real rate is approximately:
= 3% - 4%
= -1%.
(Calculated more strictly, it would be ( 1.03 / 1.04 ) - 1 = -0.96%.)
2.
Inflation-proof.
3.
Tangible. For example the real assets of a business would include its stock, plant and machinery.
4.
Real property means land and buildings.
5.
Real-life issues and opportunities are those with a strong foundation in practical experience.
(Contrasted with other issues which are considered to be more theoretical.)
6.
Options.
Relating to an operational decision or outcome.
7.
Economics.
Referring to the part of the total economy which excludes financial markets and financial services.
