Science Fair Project Encyclopedia
The term 'real', when used in an economic context, means 'inflation adjusted'. When comparing nominal wages, or unadjusted wages, the figures seen will include any inflation incurred within the economy that year. An example of why this is not helpful follows:
In an example economy, wages rise from £20,000 in year one to £20,400 in year two, to £20,604 in year three. If inflation in the economy is 2% p.a. then the implication of these figures changes depending upon whether they are REAL wages or NOMINAL wages.
If the wages are REAL, or inflation adjusted, then people can afford to consume 2% more every year in the economy. If the wages are NOMINAL, then the falling value of money in the economy (as measured by inflation) actually erodes the increases in their salary. When considering what people can actually afford to buy, their consumption will not change as the increases in their salary year on year (2%) are eroded by the falling value of the currency (by 2%).
Thus far, only the difference between the two terms has been mentioned. The real USE of adjusted figures comes into its own when undertaking some form of economic analysis . If a student wanted to write a report on the relative economic successes of two nations then real figures are far more useful than nominal figures. A statement in the form " Country A is becoming wealthier each year than Country B because their wage levels are rising by an average of £500 in Country A as opposed to £250 in Country B" can be totally disproved with knowledge of inflation in each country. An inflation rate of 100% in Country A each year, will result in its citizens becoming rapidly poorer than those of Country B where inflation is 2%. Based on this inflation information, the statement would re-read "Despite nominal wages in Country A rising faster than those in Country B, real wages are falling significantly as the currency halves in value each year".
A similar example might be another student researching wage levels in his/her own country in the last 30years. It is frequent to hear older people describing "what they could buy for £5 30years ago" and this just shows the impact that inflation has on the economy. A student could be significantly mislead to learn that in 1970 the average wage was, for example, £1000. The obvious, uninitiated conclusion to be drawn being "Wow, people were really poor back then!". The value of sterling has, of course, significantly fallen since then with the vast majority of Britons earning more than this a month. Studying real as opposed to nominal figures gives us a realistic impression of value data holds.
In conclusion, real wages are a useful economic measure, as opposed to nominal wages, which simply show the monetary value of wages in that year.
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