What Is Real Value?
The real value of an item, also called its relative price, is its nominal value adjusted for inflation and measures that value in terms of another item.
Key Takeaways
- The real value of an item, also called its relative price, is its nominal value adjusted for inflation and measures that value in terms of another item.
- Real values are more important than nominal values for economic measures, such as gross domestic product (GDP) and personal incomes.
- The nominal value of time-series data, such as GDP and incomes, is adjusted by a deflator to derive real values.
Understanding Real Values
Real values are more important than nominal values for economic measures, such as gross domestic product (GDP) and personal incomes, because they help ascertain the extent to which increases over time are driven by inflation as opposed to what is driven by actual growth.For example, if personal income is $50,000 in year one and $52,000 in year two, and the rate of inflation is 3%, then the nominal growth rate of income is 4% [($52,000 – $50,000) ÷ $50,000], while the real growth rate is only 1% (4% – 3%).
Real value is obtained by removing the effect of price level changes from the nominal value of a good, service, or time-series data, so as to obtain a truer picture of economic trends. The nominal value of time-series data, such as GDP and incomes, is adjusted by a deflator to derive real values.
In the U.S., the Bureau of Economic Analysis (BEA) maintains the GDP deflator that is used to compute the real rate of economic growth. The deflator currently uses 2012 as the base year, which means that it is set to 100 for 2012, with other years reported relative to the 2012 dollar's purchasing power.
Real Value vs. Perceived Value
Real value is fairlyeasy to measure. A business must account for the costs of labor, raw materials, shipping, marketing, and product development, which allows it to calculate the product's real value. Perceived value isn't as easy, since many factors that play into it aren't tangible or precisely measurable.Factors such as scarcity (including artificial scarcity), marketing efforts, novelty, and brand associationsall play into perceived value.
For example, two businesses may sell similar cars that cost the same amount to produce, giving them identical real values. However, one car will likely have a higher perceived value if its maker has a reputation for reliability and if the car is thecenter of a national marketing campaign that successfully builds buzz.
The impact of real and perceived values, and the differences between them, become real in sales numbersand in the pricing of products. A higher perceived value will lead consumers to think that a product is better than other items with the same real value selling for a similar price.
At the same time, the price can impact the perceptions of value. For example, businesses that release special limited editions of existing products can sometimes create a sense of a higher perceived value, due to exclusivity and novelty, even if the product has the same real value as an existing item that sells for a lower price.
