Real return

1. Inflation - comparative measures - money terms.

A real terms measure is one which has been restated to exclude the effects of inflation.

When inflation is positive, real terms measures of future amounts are correspondingly smaller, the effects of inflationary growth having been stripped out.

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 terms rate compound together to produce the nominal (money terms) 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. Theory - practical application - greenwash.

Real terms significance and application generally refers to important actions and the actual net effects of those important actions.

Contrasted with statements or activities that are not backed up with such actions.

For example, greenwashing activities are ones that have minimal positive environmental impact in real terms.

See also

• Greenwash
• Inflation
• Money terms
• Nominal
• Real
• Real economy
• Real estate
• Real income
• Real option
• Real interest rate
• Real rate

Other resources

The real deal, The Treasurer student article