Final answer:
To calculate the real value from nominal value and price level, use the formula real = nominal/price level. This adjustment accounts for inflation and uses a price index related to a chosen base year. Real values reflect purchasing power and actual quantities like the number of t-shirts sold without the distortions of price changes.
Step-by-step explanation:
To calculate the real value of an economic statistic such as GDP, we use the formula real = nominal/price level. Essentially, the real value is the value after accounting for changes in inflation. This calculation involves choosing a base year and using a price index to adjust nominal values to reflect the purchasing power of money in the base year. The price index is often published as an integer by multiplying the actual index value, such as 1.00, 0.85, or 1.25, by 100 to get values like 100, 85, or 125. For accurate calculations, it's necessary to divide the published price index by 100 when using it in the formula.
An example of adjusting nominal values to real values could be a t-shirt company, Coolshirts, which sells 10 t-shirts at a price of $9 each. The nominal revenue would be 10 t-shirts multiplied by $9, giving us $90. To find the real income, we would divide this nominal revenue by the price of one t-shirt, i.e., $90 divided by $9, which equals 10 t-shirts. This result reflects the actual quantity without the effects of inflation.