Nominal Vs. Real Costs

Money is worth less with inflation.

In economics, the difference between nominal and real costs is the adjustment for inflation. Real costs account for changes in price, while nominal costs offer an assessment of quantity.

Nominal Costs

Nominal costs are those that do not account for inflation. Nominal costs are useful when considering the changes in prices over a given time.

Real Costs

Real costs are used to better understand the change of the value of a good or service over time. Because they account for inflation, real costs are a good barometer for the scarcity inherent in the market for that particular commodity.

Nominal Cost Uses

Nominal costs are used to assess the purchasing power of a dollar.

Real Cost Uses

Real costs are considered when trying to understand the full picture of the economic situation at a given time.

Indexes

To understand the economy and cost of living, economists use several tools that employ both real costs. These include various consumer indexes, such as the Consumer Price Index and various other commodity bundles.

References

• Library Economics Liberty; Real vs. Nominal
• West Virginia University: Converting Nominal Dollars into Real Dollars