Final answer:
The difference between nominal and real economic data lies in the adjustment for inflation. Nominal values are measured using current prices, while real values are adjusted to reflect true changes in quantity by removing the price level effects, making real values more significant for accurate economic analysis.
Step-by-step explanation:
The key difference between economic data measured in nominal terms and real terms is the adjustment for inflation. Nominal economic statistics represent values computed using current market prices without adjusting for changes in price levels over time, giving an unadjusted figure. In contrast, real economic statistics adjust nominal data to remove the effects of inflation, providing a clearer picture of economic performance by reflecting the actual change in quantities of goods and services produced.
This is significant because inflation can distort the true change in economic value. For example, if nominal GDP increases, it might be due to higher production or higher prices or both. Only by converting nominal GDP to real GDP can we ascertain if the economic growth is from increased production, rather than just inflation. This conversion applies a price index, like the Consumer Price Index (CPI) or GDP deflator, to translate nominal figures to real values.
Focusing on real values is crucial for evaluating economic well-being as it reflects changes in purchasing power. It helps in making more informed decisions about policy, investment, and personal finance. Therefore, typically, more attention should be paid to real income rather than nominal income since it accounts for changes in the cost of living.