Nominal Variables: expressed in terms of Money
Real Variables: expressed in terms of Goods and services
Nominal quantities: expressed in current price.
Real quantities: expressed in constant price, i.e. the price level for a reference period.
Transforming a nominal variable into a real variable:
-Your wage in 2011 was $5000. Your wage in 2012 is $5500. Clearly wage is a nominal variable.
-Price level in 2011 was 110, Price level in 2012 is 125.
Real Wage in 2011 =
Real Wage in 2012 =
How do you interpret the real wages?
Think of GDP as a pie. The price level is just the price of a single slice, slices are identical. In 2011 you
could afford 45.45 slices. Your real wage in 2011, therefore, reflects your purchasing power. Your
purchasing power in 2012 has gone down.
People in general are not comfortable with this analogy. Tell your parents that your purchasing power
went down by half a slice of GDP in 2012! All they can see is that your wage has gone up from $5000 to