Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
Growing economies: d) Conversion of nominal to real values
Converting nominal values to real values is crucial for accurately assessing economic growth.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 4 of 5
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Converting nominal values to real values is crucial for accurately assessing economic growth. Nominal values are expressed in current prices and do not account for inflation, which distorts the true change in variables like Gross Domestic Product (GDP). Real values are adjusted for inflation, reflecting actual purchasing power or volume of output. To convert a nominal value to a real value, a price index is used. The formula is: Real Value = (Nominal Value / Price Index) × 100. For example, if nominal GDP is £120 billion and the price index is 120, real GDP is (£120 billion / 120) × 100 = £100 billion. This conversion allows economists to determine if an economy is genuinely growing or just experiencing inflation.
What earns the marks
- Define nominal values as data measured in current prices, unadjusted for the effects of inflation.
- Define real values as data adjusted for inflation, representing constant prices and actual purchasing power.
- Apply the formula: Real Value = (Nominal Value / Price Index) × 100 to calculate real economic variables.
- Interpret the results of a conversion to explain changes in actual economic output or living standards.
- Explain why using real values is essential for making valid historical comparisons of economic performance.
Common mistakes and how to put them right
Multiplying the nominal value by the price index instead of dividing.
Put it right: Divide the nominal value by the price index before multiplying by 100.
Confusing the base year index value.
Put it right: The price index in the base year is always exactly 100.
Assuming a rise in nominal GDP means living standards have improved.
Put it right: If inflation is higher than nominal GDP growth, real GDP and living standards have actually fallen.
Exam tips
- Always check whether data in a table or chart is presented in nominal or real terms before using it in your analysis.
- When calculating real values, ensure you use the correct price index for the specific year in question.
- Use real values when evaluating the success of government macroeconomic policies aimed at achieving economic growth.
Try the lesson
The start of the Growing economies: d) Conversion of nominal to real values lesson, made from checked teaching notes for this specification point.
Have a go first
What is the primary purpose of converting nominal economic values into real values?
Listen
Converting nominal values to real values is crucial for accurately assessing economic growth. Nominal values are expressed in current prices and do not account for inflation, which distorts the true change in variables like Gross Domestic Product (GDP). Real values are adjusted for inflation, reflecting actual purchasing power or volume of output. To convert a nominal value to a real value, a price index is used. The formula is: Real Value = (Nominal Value / Price Index) × 100. For example, if nominal GDP is £120 billion and the price index is 120, real GDP is (£120 billion / 120) × 100 = £100 billion. This conversion allows economists to determine if an economy is genuinely growing or just experiencing inflation. A strong answer earns marks for these points. Define nominal values as data measured in current prices, unadjusted for the effects of inflation. Define real values as data adjusted for inflation, representing constant prices and actual purchasing power. Apply the formula: Real Value = (Nominal Value / Price Index) × 100 to calculate real economic variables. Interpret the results of a conversion to explain changes in actual economic output or living standards. A common slip: Multiplying the nominal value by the price index instead of dividing. Instead, divide the nominal value by the price index before multiplying by 100. Exam tip: Always check whether data in a table or chart is presented in nominal or real terms before using it in your analysis.
See it
Put it in order
Put these steps in the order they happen.
- 1. Divide by price index
- 2. Multiply by 100
- 3. Nominal value in current prices
- 4. Assess whether economy is genuinely growing or just experiencing inflation
- 5. Real value adjusted for inflation
Key words
Say what each word means before you turn the card.
Nominal values
Try answering aloud or in your head before turning the card.
Real values
Try answering aloud or in your head before turning the card.
Price index
Try answering aloud or in your head before turning the card.
Economic growth
Try answering aloud or in your head before turning the card.
See every definition
- Nominal values
- Data measured in current prices, unadjusted for the effects of inflation.
- Real values
- Data adjusted for inflation, representing constant prices and actual purchasing power.
- Price index
- A measure used to convert a nominal value to a real value, with a value of exactly 100 in the base year.
- Economic growth
- A genuine increase in an economy's output, which can be determined by converting nominal values to real values to see whether the economy is really growing or just experiencing inflation.
Label the diagram
Some boxes have lost their names. Pick the right name for each number.
1Box 1
2Box 2
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