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Nominal Terms: Definition & Overview

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

The same number or value can give you greatly different information depending upon how it is derived. In this lesson, you'll learn about nominal terms in business and economics. You'll also have a chance to take a short quiz.

Definition

A nominal term is an unadjusted number of something such as wages, stock prices, assets, and interest rates and is generally described in fixed monetary terms. On the other hand, a real term takes into account changes in price level over time. Real value is a far more accurate measurement of value than nominal value. You can think of nominal value as face value, and face value doesn't always equal real value.

Examples

Let's illustrate the difference between nominal and real values with some simple examples. Imagine you find a rare coin with the face value of a $0.01. However, that penny's adjusted value based upon market demand is $2,000. Would you be willing to sell the penny for its nominal value?

Imagine that you loaned a friend $1,000 dollars for one year at an interest rate of 10%. Your nominal rate of return is 10%. However, inflation during the year of the loan was a robust 4%. When you adjust your nominal rate of return to adjust for the inflation, your real rate of return is only 6%.

Let's say you receive a 3% raise in salary. At first, you are fairly happy with the nominal increase in pay - until you find out that the inflation rate for the year was 3.5%, which means that even with your raise, you actually have lost purchasing power.

Importance in Analysis

It's important to understand whether you are looking at a nominal term or a real term. Sound financial and economic analysis often requires you to adjust nominal terms to their real value. This can clearly be seen by reviewing the examples discussed above. A nominal rate of return or a raise in the nominal wage rate may not nearly be as valuable when adjusted for inflation. On the other hand, some assets' real value may greatly exceed their nominal values, as in the case of collectible coins, stamps, and securities.

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