Annexe I: Basic concepts of macroeconomics
At the national level
Real variables vs nominal variables
Economists and other policymakers use ‘real variables’ and ‘nominal variables’ to help them compare the value of different economic measures over time, such as wages, interest rates, or GDP. Real variables refer to the amount after adjusting for the inflation and thus, paint a more accurate picture of the change. Whereas nominal variables are those which have not been adjusted for inflation, so they might be misleading.
For example, when a government official talks about a 5% increase in the minimum wage by looking at nominal wages (i.e., the value of wages over a certain period of time without taking interest into account), this rise seems to indicate an increase in the living standard of workers. However, if inflation also increased by 5% during the same period (i.e., looking at ‘real wages’ instead of ‘nominal wages’), we find the real wage growth is actually zero.
Even though a worker receives a higher wage compared to the previous period, she doesn’t see any difference in her living standards because the cost of living has also increased in the same amount alongside her wage. In other words, with the increased amount of money she has, she still affords the same amount of goods and services in comparison to last year.