Neutrality

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.

See also

• Inflation
• Real interest rate
• Real rate
• Nominal
• Real option
• Real economy
• Effective annual rate
• Treasury inflation-indexed securities