Real rate: Difference between revisions
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imported>Doug Williamson (Expand for money terms etc.) |
imported>Doug Williamson (Improve calculations.) |
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Real rate = ( ( 1 + Nominal rate ) / ( 1 + Inflation rate ) ) - 1 | 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 | ||
Revision as of 19:33, 15 January 2016
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%.
