The Real World Is Nominal

A blog about business and economics.
Dec. 19 2012 2:35 PM

The Real World Is Nominal

One of the strangest controversies in the economics profession is that there's some debate as to whether or not nominal shocks have real consequences. And it seems to me that a great deal of mischief is being done here by the use of the word "real" to mean "adjusted for inflation" when as we can see in the debate over whether Social Security benefits should be indexed to the CPI-W or the C-CPI-U there's no unambiguous definition of what the alleged real quantities are.

So stop and think for a minute about the economy. In the past month I have negotiated a new salary for 2013, signed a contract to buy a house, reached an agreement on a 30-year mortgage, signed a two-year mobile phone service contract with Verizon, and agreed to accept a fee for work I'll be doing in January. None of these arrangements is indexed to the CPI-W, the C-CPI-U, the CPI-U, the PCE deflator, the GDP deflator, or any other measure of inflation. Like the vast majority of economic agreements, they are specified in nominal terms. Adjusting for inflation to derive "real" values is an interesting economists' concept, applied to some public sector programs and union contracts but these different adjustments apply different price indexes and the majority of business is transacted nominally. So since business is conducted in nominal terms, nominal shocks impact the economic relationships of firms and households.


And one should note it's a good thing that the world is specified in nominal terms. If we inflation-adjusted everything, then relatively minor "real" shocks could have crazy consequences. A drought would push up the price of grain, and therefore food in general, and therefore there'd be inflation. Then thanks to the inflation everything would be indexed upward and there'd be . . . even more inflation.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Two Damn Good, Very Different Movies About Soldiers Returning From War

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Students Aren’t Going to College Football Games as Much Anymore, and Schools Are Getting Worried

The Good Wife Is Cynical, Thrilling, and Grown-Up. It’s Also TV’s Best Drama.

  News & Politics
Sept. 19 2014 9:15 PM Chris Christie, Better Than Ever
Sept. 19 2014 6:35 PM Pabst Blue Ribbon is Being Sold to the Russians, Was So Over Anyway
Inside Higher Ed
Sept. 19 2014 1:34 PM Empty Seats, Fewer Donors? College football isn’t attracting the audience it used to.
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
Brow Beat
Sept. 19 2014 4:48 PM You Should Be Listening to Sbtrkt
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Medical Examiner
Sept. 19 2014 5:09 PM Did America Get Fat by Drinking Diet Soda?   A high-profile study points the finger at artificial sweeteners.
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.