If nominal growth is 23.2%, what is real growth? The difference between two statistical figures
The National Statistics Committee has explained nominal and real growth. Nominal growth is the change in value in money terms; real growth is the change with the effect of prices removed. This article shows the difference with other examples and a simple formula.
In statistical releases the word “growth” appears in two senses: nominal and real. Both are given as percentages, but they measure different things. The National Statistics Committee has explained the difference; below the topic is covered with other examples and a simple formula.
Two concepts
- Nominal growth shows the change in value in money terms: it is calculated at the prices of the period itself. It is affected by changes in both volume and prices.
- Real growth shows the change that remains after the effect of price changes is removed. In production it is the change in volume; in incomes, the change in purchasing power.
How is it calculated?
A simplified formula: real growth (%) = ((100 + nominal growth) / (100 + price growth) − 1) × 100. Here nominal growth and price growth are taken as percentages.
Example 1: a garment workshop (hypothetical)
The “Nodira” garment workshop made 2,000 shirts last year and sold each for 150,000 soums. This year it made 2,200 shirts and the price rose to 168,000 soums.
| Indicator | Last year | This year | Change |
|---|---|---|---|
| Number of shirts | 2,000 | 2,200 | +10.0% |
| Price of one shirt, soums | 150,000 | 168,000 | +12.0% |
| Value of output, million soums | 300.0 | 369.6 | +23.2% |
The 23.2% rise in value is nominal growth. Removing the effect of prices gives (123.2 / 112 − 1) × 100 = 10%. This is real growth; it equals the growth in the number of shirts, and the rest of the rise in value came from the price.
Example 2: incomes and purchasing power (hypothetical)
A worker’s pay can rise in nominal terms, but if prices rise faster, the worker can buy less than before. The three cases below show this:
| Nominal income growth | Price growth | Real growth (purchasing power) |
|---|---|---|
| +12% | +8% | +3.7% |
| +8% | +8% | 0% |
| +5% | +8% | −2.8% |
In the first row the calculation is (112 / 108 − 1) × 100 = 3.7%. In the third row pay rose by 5% and prices by 8%: (105 / 108 − 1) × 100 = −2.8%, that is, purchasing power fell.
What to look for when reading a statistical release
- Is there a note saying “in real terms” or “nominal”? If there is none, do not assume the growth is free of the effect of prices.
- When prices are rising fast, nominal growth looks high while real growth can be much lower.
- In releases published these days: the 14.2% growth in health services is stated “in real terms”; the releases on the 11% growth in electrical equipment output and the 22% growth in financial services carry no such note.
Note
The examples were made up by the author and the figures are hypothetical. The formula is simplified: the official calculation method (how price indices are applied) is not given in the release.
Official source
For information only; check the official text at the source.