The costs are divided into three types, namely money costs, real costs and opportunity costs. Money costs: Money costs are also known as nominal costs and normal costs. They refer to the money payments made by a producer for producing goods. Money costs are further divided into two types namely Explicit costs and Implicit costs. To convert nominal economic data from several different years into real, inflation-adjusted data, the starting point is to choose a base year arbitrarily and then use a price index to convert the measurements so that they are measured in the money prevailing in the base year.

Ways to earn money online. Nominal money is the amount of money you have. Real money is the value of that money.

Both nominal, real concepts are used in different economic grounds such as GDP, output, income, and interest rates. Difference Between Nominal and Real Values Definition Nominal value is defined as the money value of a commodity. Real value is defined as the nominal value adjusted for inflation. Opportunity Cost vs Monetary Value. Money illusion refers to our tendency to consider only the nominal value of something, rather than its ‘real value’ – what it is worth in ‘real terms’. People suffering from money illusion see one dollar today as still one dollar tomorrow, next year, and in ten years’ time. In financial accounting, cash flow refers to the rates at which money flows into, and out of, a business or organization. Cash flow is important because it shows how well a business is able to meet its financial obligations in the near term. Businesses with high net worths but poor cash.

If Alice had $50 in her purse in January 1970 and Bob had $50 in his wallet in January 2020, they both have the same nominal amount of money. Due to inflation, however, Alice's $50 is worth much more than Bob's $50. If you wanted to do a meaningful comparison of how much wealth each had, you'd need to convert nominal money into real money. One way to do that is to look up historical inflation (or use an inflation calculator). That shows that Alice's nominal $50 was worth a real $548.87. That is, Alice could get almost 11 times more goods and services for her money than Bob could get for his.

From a personal finance perspective, if you're putting money in a savings account that earns 0.5% interest while inflation is averaging 2%, the amount of money you have in nominal terms is increasing at 0.5% per year. But the amount of real money you have is decreasing at a rate of 1.5% per year since you're not making enough to keep up with inflation.

Last updated: February 2, 2000

Nominal Vs Real Values

Note: These notes are preliminary and incomplete and they are not guaranteed to be free of errors. Please let me know if you find typos or other errors.

The Asset Market

Up to now we have covered (1) the labor market and the production function, where real wages, employment and potential output is determined, and (2) the market for goods and services, where the real interest rate and investment and saving are determined. Now we consider the market for financial assets (money and 'bonds') by focusing on the demand and supply of money in the economy. This will give us insights into other forces on interest rates - particularly those created by the Fed - and also on the ultimate determinants of inflation.

What is Money?

Medium of exchange - barter is inefficient.
Unit of account - money is the basic unit for measuring economic value.
Store of value - money can be used to hold wealth.
Low return (interest rate) - money pays no interest
Low risk - money is a 'safe' asset in low inflation times
High liquidity - money is the most liquid asset (money is accepted immediately for almost all transactions)

Definitions of monetary aggregates

Symbol	Assets Included	Billions of dollars (1996)
C	Currency	$358.9
M1	Currency, demand deposits, traveler's checks, checkable deposits.	$1,095.3
M2	Currency, M1, overnight repos, eurodollars, money market deposit accounts, money market mutual funds, saving and small time deposits.	$3,761.1

In this class, when we talk about the nominal money supply we will generally be referring to the monetary aggregate M1. Hereafter, the symbol 'M' will denote M1.

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The supply of money

The Federal Reserve Bank (Fed)

The Federal Reserve Bank (Fed) ultimately controls the supply of money in the economy. (How it does this and how the banking system works is detailed in the lectures on the Fed and Monetary Policy.) The Fed is the central bank for the U.S. and is a quasi-private entity (technically owned by private banks) created by the Federal Reserve Act in 1913. There are twelve regional Federal Reserve Banks across the country and the leadership of the system is conducted by the Board of Governors of the Federal Reserve System (Federal Reserve Board ). The Board consists of seven governors, appointed by the President to staggered fourteen-year terms. The President appoints one Board member as chairman - currently Allen Greenspan - for a term of four years. It is important to keep in mind that the Fed operates independently of the federal government. Congress and the President do not have direct control over the operations of the Fed.

How the Fed Controls the Money Supply

The Fed primarily controls the supply of money (M1) in the economy through what are called open market operations. These are the purchase and sale of government bonds by the Fed. The Fed operates the printing presses for the creation of currency. The Fed also owns a substantial amount of U.S. government bonds. When the Fed wants to increase the supply of money it performs an open market purchase of government bonds. That is, the Fed buys (by printing money) outstanding government bonds from the public or new government bonds from the Treasury (to finance the current deficit). This operations injects new cash into the economy. Conversely, when the Fed wants to decease the amount of money in the economy it performs an open market sale of government bonds. Here, the Fed sells some of its holdings of government bonds to the public in exchange for cash. This operation takes cash out of the economy.

Portfolio Allocation and the Demand for Assets

Portfolio theory tells us how individuals allocate their wealth among a number of financial assets (e.g. stocks, bonds, real estate, money). In general an individual's demand for assets is based on comparing the benefits of costs of holding different kinds of assets. These costs and benefits are functions of the following assets characteristics:

Expected return - expected gain (or loss) from holding an asset over a particular investment horizon
Risk - the degree of uncertainty in an asset's return

What Is Real And Nominal Money