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Real v money data

One of the most crucial things to look at whenever you look at growth and GDP figures is whether they are in real terms.

Real terms

Measuring Real GDP means measuring the actual goods and service produced and sold and this can only be done by calculating the value of goods and services (trying adding up 3 tractors, 4 monitors, 10 ice-creams and a haircut  and come up with a meaningful answer). BUT  the value of goods and services  can change either because  the number changed or because the prices changed. To find the real change we must take out the effects of price changes so comparisons can be effective. Therefore real GDP is often defined in terms of the value of GDP minus the effects of inflation/deflation.

If they are not in real terms, then they are described as being in nominal or money terms. This means that they are valued at the same value as money was worth at the time the data was recorded or inflation/deflation has not been accounted for.

However, just to muddle things, the data may not be described as being in real terms. The expression that is often used is that the data is at constant prices. This means that the whole series is expressed at the prices that were ruling in a particular year, e.g. at 2008 prices. If the data is expressed in nominal or money terms, then it may be described as being valued at current prices. So, remember:

Current prices - includes the impact of inflation, as output is valued at prices currently prevailing in markets.

Constant prices - the effect of inflation has been removed and the variable is in real terms.

GDP at constant and current prices - Italy

GDP at constant and current prices - Turkey

The brown line shows GDP at current prices, and this clearly grows a lot faster than GDP at constant prices. The difference between the two datasets is simply inflation. In this graph, GDP is expressed at the prices ruling in the base year of the index.

So, first thing when you look at a piece of data - is it in real or nominal terms?