# Understanding Nominal Values in Finance and Economics: A Comprehensive Guide

## What Is Nominal?

Nominal is a common financial term with various meanings. In business pricing, a nominal fee is a small charge for less than the cost of the service provided, or one that has a negligible impact on one's finances. In economics, it refers to the dollar value of a price or measurement—in other words, one that is not adjusted for inflation.

Nominal values can also refer to the face value of a bond, as opposed to the market price. The difference between real and nominal values is essential in understanding economic growth.

### Key Takeaways

*   Nominal values refer to figures that haven't been adjusted for inflation, seasonality, or compounding, offering a basic measure that contrasts with "real" values which do account for these factors.  
    
*   Understanding the difference between nominal and real interest rates is crucial for accurate financial analysis, as real interest rates adjust the nominal rate for inflation to reflect the true cost or earnings.  
    
*   Nominal rates of return provide the initial percentage of earnings without accounting for inflation, which is essential for assessing the true purchasing power of investment returns.  
    
*   In finance, nominal figures often relate to the face value of assets, like bonds, meaning what the asset is worth on paper without any adjustments.

## Different Contexts of Nominal in Finance and Economics

In finance and economics, nominal may also refer to an unadjusted rate or the change in value. When defining items like the gross domestic product (GDP) or interest rates, nominal points to a figure that is unadjusted for [seasonality](https://www.investopedia.com/terms/s/seasonality.asp), inflation, interest [compounding](https://www.investopedia.com/terms/c/compounding.asp), and other modifiers.  In this context, nominal contrasts with "real" statistics that adjust results.

Because a nominal figure shows unadjusted value, it's not ideal for comparison. Imagine someone with $100 in 1950 compared to $100 in 2020. Although both have $100 as the nominal value, inflation affects the real value. The nominal value of an asset can also mean its face value. For example, a bond with a face value of $1,000 has a nominal value of $1,000.

## Comparing Nominal and Real Values

The term real, as opposed to nominal, expresses the value of something after making adjustments for various factors in creating a more accurate measure. For example, the difference between nominal and real GDP is that nominal GDP measures the economic output of a country using current market prices, and real GDP takes inflation into account to create a more accurate measure.

## Understanding Nominal vs. Real Rate of Return

The [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp) (RoR) is the amount an investor earns on an investment. While the nominal rate of return reflects the investor's earnings as a percentage of the initial investment, the real rate takes inflation into account. As a result, the real rate gives a more accurate assessment of the actual buying power of the investor's earnings.

For example, imagine you buy a $10,000 stock and sell it the following year for $11,000. Your nominal rate of return is 10%. However, to get a more accurate picture of your [actual return](https://www.investopedia.com/terms/a/actualreturn.asp), this rate needs to be adjusted for inflation, as the [purchasing power](https://www.investopedia.com/terms/p/purchasingpower.asp) of your money has likely changed over the one year. So, if inflation is 4% that year, the real return is 6%, subtracting inflation from nominal growth.

## Exploring Nominal and Real Interest Rates

Like the difference between nominal and real rates of return, the difference between nominal and real interest rates is that the latter is adjusted for inflation. For example, if an investment is expected to return 7% interest, but the inflation rate is 4%, then the [real interest rate](https://www.investopedia.com/terms/r/realinterestrate.asp) on that investment is only 3%.

However, in terms of interest, the nominal rate also contrasts with the [annual percentage rate](https://www.investopedia.com/terms/a/apr.asp) (APR) and the [annual percentage yield](https://www.investopedia.com/terms/a/apy.asp) (APY). In the case of APY, the nominal, or stated rate is the rate the lender advertises, and it is the basic interest rate the consumer pays on the loan.

On the other hand, APR takes into account fees and other costs associated with the loan, and it calculates the interest rate with those factors in mind. For example, imagine a borrower takes out a $1,000 loan with a 5% nominal interest rate, but they also pay a $100 origination fee. During the first year of the loan, they face $50 in interest fees. However, when we factor in the origination fee, they pay $150 in fees and interest.

This total fee sum equates to a 15% APR. Conversely, APY takes both the fees and the effect of compounding into account to give the borrower an even more accurate picture of their interest rate.

## Real-World Example of Nominal Value

As in the example above, the nominal value for someone who has $100 in 1950 does not change for someone who has $100 in 2020. What does change is the [purchasing power](https://www.investopedia.com/terms/p/purchasingpower.asp), where inflation decreases purchasing power over time. Assuming an average annual inflation rate of 3.46% from 1950 to 2020, then what $100 would buy in 1950 would cost $1,081 in 2020. Thus, the real value of $100 in 1950 would be $1,081 in 2020.

## The Bottom Line

In finance, "nominal" refers to values unadjusted for inflation, which can alter the true worth of assets, rates, or returns. Distinguishing between nominal and real values is necessary to understand actual purchasing power. For example, a 5% nominal return during 3% inflation is only a real gain of 2%. Considering both helps investors and consumers make better financial choices.

> **Article Sources**
>
> 1.  Federal Reserve Bank of St. Louis. "[Getting Real about Interest Rates - The Economic Lowdown Podcast Series](https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-14-getting-real-about-interest-rates)."