INTRODUCTION.
The distinction between nominal are real variables applies to all variables whose unit of measurement is so many per unit.
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It does not apply to units of output, such as 4000 washing machines per annum, which relate to physical quantities. Whatever the inflation rate, 4000 washing machines is 4000 washing machines. However, we do not know whether £100 is a large or a small number until we know the general price level for goods.
WHERE WE CURRENTLY ARE
We Have seen how this idea may be used to distinguish nominal and real wages rates, in the first instance, are measured in pounds. The argument Carries over to price themselves. We have already seen that the normal price of silver rose considerably the 1970s.
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We can calculate and index of the real price of silver by dividing an index of nominal silver prices by the retail price index and multiplying by 100.
Real prices provide and indicator of economic scarcity. They show whether the price of some commodity is rising more rapidly than prices of goods in general. For this reason real prices are sometimes called relative prices, just as real wage rate tell us what is happening to the price of labour relative to the price of goods in general.
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We can discuss an example of real prices without going through the tedious arithmetic required to illustrate actual numbers. Consider the price of television over the last 30years. Television prices, as measured in pounds, have risen very slowly.
The RPI has risen much more quickly. Thus, the real price of television has actually fallen.
Advances in technology have reduced the cost of producing televisions.
The real price , measuring economic scarcity, has felled. Because the real price has fallen, many more household are now able to afford television.
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Conclusion.
Nominal wages rates have risen much more rapidly than the nominal price of televisions.
This example reinforces our claim that it may be very misleading to base our analysis on nominal values of variables. Real prices, like real wage rate, will play an important role iin the analysis of later chapter.