What’s the real meaning of life? The real value?
Don’t ask an economist, because it won’t be the philosophical answer you were hoping for.
The value of a thing is different to different people. You may value your dog, while your neighbor sees your dog as his worst enemy. But in economics, “value” refers to market value. What are people willing to pay for this thing?
Real value then, is what people are willing to pay for the value...taking out inflation. The nominal values of goods are all around us: they’re the price tags in our faces. But things get more expensive. Grandma will tell you; back in the good ol' days, gas was under a dollar, and it cost fifty cents to go to the movies.
The real value of goods is that nominal amount we’re used to seeing, subtracting inflation. If you took the real value of movie tickets now and the real value of movie tickets when their nominal price was fifty cents a pop, you can see if people are willing to spend more or less on movies today compared to back then.
Real values allow us to compare prices of things over time, even as inflation climbs. College costs and healthcare costs in the U.S. are two good examples. The real cost of these goods has risen a lot. That’s why, back in the day, you could pay for college by waiting tables at night, and you can’t today. We still try though.
Related or Semi-related Video
Finance: What Is a Real Return?67 Views
finance- a la shmoop. what is a real return? like is there a fake return? you
know like the news? well kinda .real return refers to an [man frowns talking to camera]
investment return mapped against inflation. so let's say you invest in a
bond that pays five percent a year for ten years and then pays you back your
principal .boring but nice- you know like a good doctor visit. your nominal return
over that period was 5% but since inflation was 3% a year during that
period on average your real return was only 2% a year- meaning that the
performance of your investment only eked out a 2% net gain against the price of [equation]
milk gas and you know knocked off iPhones. so don't be a chump who thinks
that they're making more money than they really are, and you know keep on keeping
it real. [man sitting in chair, talks to camera]
Up Next
What are Gross Domestic Product (GDP) and Gross National Product (GNP)? The Gross Domestic Product is the sum total value of products and services...
What is stock based compensation? Stock based compensation is exactly what it sounds like: a way to compensate employees using stock. It’s used i...