What is 'Real Value'

Real value is nominal value adjusted for inflation. The real value is obtained by removing the effect of price level changes from the nominal value of time-series data, so as to obtain a truer picture of economic trends. The nominal value of time-series data such as gross domestic product and incomes is adjusted by a deflator to derive their real values.

BREAKING DOWN 'Real Value'

Real values are more important than nominal values for economic measures, such as GDP and personal incomes, because they help ascertain the extent to which increases over time are driven by inflation and what is driven by actual growth. For example, if personal income is $50,000 year 1 and $52,000 in year 2, but the rate of inflation is 3 percent, then the nominal growth rate of income is 4 percent, while the real growth rate is 1 percent.

In the U.S., the Bureau of Economic Analysis maintains the GDP Deflator that is used to compute the real rate of economic growth. The Deflator uses 2005 as the base year, which means that it is set to 100 for 2005, with other years reported relative to the 2005 dollar.

Real Value vs. Perceived Value

Real value is fairly easy to measure. A business must account for the costs of labor, raw materials, shipping, marketing and product development, which allows it to calculate the product's real value. Perceived value isn't as easy as many factors that play into it aren't tangible or precisely measurable. Factors such as scarcity (including artificial scarcity), marketing efforts, novelty and brand associations all play into perceived value. For example, two businesses may sell similar cars that cost the same amount to produce, giving them identical real values. However, one car will likely have a higher perceived value if its maker has a reputation for reliability, and if the car is the center of a national marketing campaign that successfully builds buzz.

The impact of real and perceived values, and the differences between them, become real in sales numbers and in the pricing of products. A higher perceived value will lead consumers to think that a product is better than other items with the same real value selling for a similar price. At the same time, the price can impact the perceptions of value. For example, businesses that release special limited editions of existing products can sometimes create a sense of a higher perceived value, due to exclusivity and novelty, even if the product has the same real value as an existing item that sells for a lower price.

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