Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
Inflation: c) Real and nominal values, constant and current prices
Understanding the distinction between real and nominal values is crucial when analysing economic data over time.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 3 of 6
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Understanding the distinction between real and nominal values is crucial when analysing economic data over time. Nominal values are expressed in the monetary terms of the period being measured, without any adjustment for inflation. In contrast, real values are adjusted to remove the effects of inflation, providing a more accurate reflection of purchasing power. This distinction is mirrored in the terms current and constant prices. Current prices refer to the actual prices at the time data was collected, equivalent to nominal values. Constant prices use a chosen base year to adjust for inflation, allowing for meaningful historical comparisons.
For example: If a worker's nominal wage increases by 4% in current prices, but inflation is 6%, their real wage in constant prices has actually fallen by approximately 2%.
What earns the marks
- Nominal values are measured in the prices prevailing at the time of measurement, unadjusted for inflation.
- Real values are adjusted for inflation to show the true purchasing power or volume of goods and services.
- Current prices are synonymous with nominal values, reflecting the monetary value at the time of the transaction.
- Constant prices are synonymous with real values, using a base year to remove the effects of price changes over time.
Common mistakes and how to put them right
Assuming that an increase in nominal GDP always means an economy is producing more goods and services.
Put it right: In reality, the increase could be entirely due to inflation.
Confusing current prices with constant prices.
Put it right: Current prices include inflation, whereas constant prices have been adjusted to remove it.
Believing that real values are always lower than nominal values.
Put it right: Real values can be higher than nominal values if the economy has experienced deflation.
Exam tips
- When analysing data tables, always check whether the figures are presented in current or constant prices before drawing conclusions about growth.
- Use the approximation formula (Real percentage change = Nominal percentage change - Inflation rate) to quickly interpret multiple-choice data.
- In written responses, explicitly state that real values measure purchasing power, which is vital for assessing changes in living standards.
Try the lesson
The start of the Inflation: c) Real and nominal values, constant and current prices lesson, made from checked teaching notes for this specification point.
Have a go first
Which of the following best describes the difference between nominal values and real values when measuring economic data?
Listen
Understanding the distinction between real and nominal values is crucial when analysing economic data over time. Nominal values are expressed in the monetary terms of the period being measured, without any adjustment for inflation. In contrast, real values are adjusted to remove the effects of inflation, providing a more accurate reflection of purchasing power. This distinction is mirrored in the terms current and constant prices. Current prices refer to the actual prices at the time data was collected, equivalent to nominal values. Constant prices use a chosen base year to adjust for inflation, allowing for meaningful historical comparisons. For example, if a worker's nominal wage increases by 4% in current prices, but inflation is 6%, their real wage in constant prices has actually fallen by approximately 2%. A strong answer earns marks for these points. Nominal values are measured in the prices prevailing at the time of measurement, unadjusted for inflation. Real values are adjusted for inflation to show the true purchasing power or volume of goods and services. Current prices are synonymous with nominal values, reflecting the monetary value at the time of the transaction. Constant prices are synonymous with real values, using a base year to remove the effects of price changes over time. Exam tip: When analysing data tables, always check whether the figures are presented in current or constant prices before drawing conclusions about growth.
See it
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.
Current prices
Try answering aloud or in your head before turning the card.
Constant prices
Try answering aloud or in your head before turning the card.
See every definition
- Nominal values
- Values expressed in the monetary terms of the period being measured, without any adjustment for inflation.
- Real values
- Values adjusted to remove the effects of inflation, providing a more accurate reflection of purchasing power.
- Current prices
- The actual prices at the time data was collected, equivalent to nominal values.
- Constant prices
- Prices that use a chosen base year to adjust for inflation, allowing for meaningful historical comparisons.
Label the diagram
Some boxes have lost their names. Pick the right name for each number.
1Box 1
2Box 2
3Box 3
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