Question

How do you convert Nominal to Real? (2 ways)

Answer 1

There are two methods to convert nominal values to real values: using a price index or applying the Fisher equation.

Step-by-step explanation:

To convert nominal values to real values, you can use two methods:

• Method 1: Using a price index

1. Choose a base year arbitrarily.
2. Calculate the price index for each year using the formula: Price Index = (Price in the current year / Price in the base year) x 100.
3. Apply the price index to the nominal values by dividing them by the price index of the respective year.
4. The resulting values will be the real values.

Method 2: Using the Fisher equation

1. Obtain the nominal interest rate and the inflation rate.
2. Apply the Fisher equation: Real interest rate = Nominal interest rate - Inflation rate.