Real, relative, and nominal prices essay sample



Constantly shifting prices usually make people confused. They cannot figure out the actual value of goods if prices steadily grow or jump up and down. Consumers become even more puzzled if told that a price in terms of money is only a nominal value of the product and it does not always coincide with its real value. However, understanding prices is not as difficult as it may seem.

Apparently sums of money we pay purchasing any goods or services are nominal prices. Real or relative price is the value of one product compared to the value of another product or service. The two notions are interchangeable, however, the term “real” is frequently used to show how prices on sets of goods changed over time. When economists talk about prices, they usually put them in dollars because consumers understand nominal price quite well. But in times of inflation, price tags do not coincide with the real value of the products. Some people get used to measuring the product value in a number of hours they need to work in order to buy this item, which is a relative price. Prices may rise and fall, but real value can resolve ambiguity set by the inflation.

Economists claim that the real price does not change over the time unlike nominal price. Inflation is a process that makes all nominal prices rise while the real price remains the same. If a bottle of soda costed as much as two bags of chips before the inflation, rising prices will not change this correlation despite the fact that products have a different price tag on them.

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