Real: Difference between revisions
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A term which has been restated to exclude the effects of inflation. | A term 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. | |||
<span style="color:#4B0082">'''Example 1'''</span> | |||
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. | ||
This is because goods which cost £100 today will cost £102 in a year's time. | This is because goods which cost £100 today will cost £102 in a year's time. | ||
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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. | ||
<span style="color:#4B0082">'''Example 2'''</span> | |||
(1.02 x 1.0784) - 1 | (1.02 x 1.0784) - 1 | ||
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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. | ||
<span style="color:#4B0082">'''Example 3'''</span> | |||
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.) | ||
<span style="color:#4B0082">'''Example 4'''</span> | |||
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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3. | 3. | ||
Tangible. For example the ''real assets'' of a business would include its stock, plant and machinery. | Tangible. | ||
For example the ''real assets'' of a business would include its stock, plant and machinery. | |||
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6. | 6. ''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. | |||
8. ''Brazil''. | |||
The Brazilian Real (BRL) is the currency of Brazil. | |||
== See also == | == See also == | ||
* [[Annual effective rate]] | |||
* [[Brazil]] | |||
* [[BRL]] | |||
* [[Effective annual rate]] | |||
* [[Financial]] | |||
* [[Inflation]] | |||
* [[Monetary]] | |||
* [[Money terms]] | |||
* [[Nominal]] | |||
* [[Real asset]] | |||
* [[Real economy]] | |||
* [[Real estate]] | |||
* [[Real exchange rate]] | |||
* [[Real GDP]] | |||
* [[Real income]] | |||
* [[Real option]] | |||
* [[Real interest rate]] | * [[Real interest rate]] | ||
* [[Real property]] | |||
* [[Real rate]] | * [[Real rate]] | ||
* [[ | * [[Real return]] | ||
* [[Real | * [[Real terms]] | ||
* [[Real | * [[Real-time]] | ||
* [[Treasury inflation-indexed securities]] | * [[Treasury inflation-indexed securities]] | ||
==Other resources== | |||
*[[Media:2013_10_Oct_-_The_real_deal.pdf| The real deal, The Treasurer student article]] | |||
*[https://academy.treasurers.org/resources/understanding-real ACT Learning Academy - Understanding "real"] | |||
[[Category:Corporate_financial_management]] | |||
Latest revision as of 00:09, 12 March 2023
1.
A term 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 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.
8. Brazil.
The Brazilian Real (BRL) is the currency of Brazil.
See also
- Annual effective rate
- Brazil
- BRL
- Effective annual rate
- Financial
- Inflation
- Monetary
- Money terms
- Nominal
- Real asset
- Real economy
- Real estate
- Real exchange rate
- Real GDP
- Real income
- Real option
- Real interest rate
- Real property
- Real rate
- Real return
- Real terms
- Real-time
- Treasury inflation-indexed securities
