The nominal term is defined as the unadjusted number of things which can be inclusive of prices of stock, wages, assets along with rate of interests and these are generally described in the fixed monetary terms. In general, the nominal is the type of common financial term with various contexts wherein it means very small or the far below real cost or value. The nominal value can be treated as the face value and the respective face value does not always equal real value. It refers to the unadjusted rate in value such as the rate of interest or the gross domestic product. It is different from the real value as real value is considered to be the more accurate measurement of the entire value in comparison to the nominal value.
For instance- There are different kinds of dissimilarities between the real and nominal value. Imagine a person finds a rare coin wherein the face value of the respective coin is $0.01. However, on the contrary, the adjusted value of the penny is based on the market related demand and it is $2000. In such scenario, whether the person will be willing to sell the penny for the nominal value.
With the help of the respective instance, it can be identified and analyzed that the nominal value is of huge importance wherein it is the statistics that can be utilised in measurement of the terms of the actual prices which exists at the respective time. For instance- As the level of price increases, even when the nominal salary of the wage earners remains the same, the amount of the different goods and services which he can be purchase with the same salary will be declining in the real terms. The same kind of situation applies to the different other economic values which includes Gross Domestic Product, Prices, Rate of Interest and Returns. Furthermore, when the rate of interest is greater than 0, the nominal kind of interest will be greater in nature than the real interest rate.
Formula- (1 + nominal rate) = (1 + real rate) * (1 + inflation rate
From the respective example and graph, the nominal against the real returns of the respective asset ‘A’ can be identified over time. In the respective graph, it can be analyzed that nominal rate of returns is always higher in nature than the normal or real return as the inflation rate is positive during the respective period.
From the respective graph, it can be analyzed that when there is an investment made which was yielding more than 9% return in the present year, then there can be gain of total $109 in the consecutive year from the $100 and it can be a profit aspect that can be improving the overall aspect of the nominal terms. The main reason is that in such scenarios, the main focus is on the consideration of the nominal values.
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