Nominal vs. real oil price

Written by amber d. walker
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Nominal vs. real oil price
Nominal is the price at the pump. (Image by Flickr.com, courtesy of futureatlas.com)

It's often confusing when pundits, economists and politicians refer to "real" and "nominal" prices for goods, as people wonder what the difference is. Oil prices are no exception.

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Nominal

The nominal price is the simplest. It is the price of oil in plain dollars and cents at the time it is traded.

Inflation and Deflation

The concept of inflation and deflation are important to understanding the differences between nominal and real prices. They refer to the tendency of prices throughout the whole economy to go either up (inflation) or down (deflation) over time.

Real

The real price is a little more complicated. It is the price of oil after an economist has attempted to correct for inflation.

Expressing Real Price

The real price is usually expressed using a phrase such as "seven 1982 dollars."

Purpose

The distinction is important because nominal prices can hide real information. For example, even though nominal oil prices were at historic highs in 2007, the real oil price was still much lower than the price of oil in 1981, when corrected for inflation.

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