A nominal dollar is the worth of a dollar or any currency in the present economy and does not take into account inflation. Because of this, the nominal dollar is often opposed to the "real" dollar when considering the value of money in different years. The "real" dollar accounts for inflation; the nominal dollar does not.
When considering the reported sum of money given over any time period, nominal dollars, referred to by some economists as current dollars, are very useful. If, for example, a worker earns $55,000 over the past year, and last year, he earned $50,000, you can say that his nominal income grew by $5,000, or by 10 percent. Or if a company sells $3 million of a product one year and $1 million the next, the nominal difference in sales would be $2 million.
Nominal dollars leave something out: inflation. If the price of all goods and services rises by 5 percent from one year to the next, the nominal dollar comparison between those two years will only tell part of the story. For our worker that had a nominal increase of 10 percent in his income from one year to the next, in a year with a 5 percent increase in goods and services, the real value of his pay increase would only be half its nominal value.
People who make their living analyzing money, like economists and investors, need to compare an economy's performance over a time period. In this analysis both the nominal and real values of a dollar become useful measurements. The nominal dollar tells us how much businesses, government, and people spent from one time period to the next; however, dollars in real-terms adjusted for inflation, show us to what degree those numbers are genuine.
Converting to Nominal Dollars
When you want to find the nominal dollar value of a specific year and you have only the real value, you use this formula:
Dollars base year = Dollars data year x Price Index base year / Price Index data year.
Essentially you are removing the inflation from the real dollar value, or converting base year real dollars into data year nominal dollars.
Converting from Nominal Dollars
To do the opposite and find a real dollar value from a nominal dollar value, you use this formula:
Dollars data year = Dollars base year x Price Index data year / Price Index base year.
- Photo Credit Pennies on the Dollar - one dollar bill with pennies. image by Andy Dean from Fotolia.com
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