Real terms

From ACT Wiki
Jump to: navigation, search

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

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.


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


Other resources

The real deal, The Treasurer student article