For example, a company's profits might increase because of increasing demand for its products or because of lower costs for its inputs. Profitability also depends on the efficiency with which resources are employed, which depends on the quality of management and the tech- nologies used for production. Expectations about future profits might be affected by whether investors expect competition to increase or decrease over time, and by how investors expect management to react to future market conditions. Investors also discount assets whose returns are especially uncertain. Changes in any of these factors can result in capital gains or losses.
Inflation can create both capital gains and losses.
By increasing the price level of assets in general, it creates capital gains even if an asset's intrinsic value is unchanged. To return to the example of the bar of gold, its real value should not change unless market conditions do. The real value of an asset is the value expressed in constant dollars, that is, after removing the effects of inflation. The nominal value is the price expressed in current dollars, that is, unadjusted for inflation. In other words, its value increases when prices go up and falls when prices drop.