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I am having trouble understanding the meaning of the real value of an economic quantity.

The concept is easy to grasp: take a year as a base and adjust for inflation by pricing a commodity with the prices from the base-year.

As I understand it, the real value of, let's say, an orange is, or should be, close to its intrinsic value. It measures the how we value an orange by its potential. This intrinsic value is dimensionless (?).

My difficulty is to reconcile the fact that humans do not think in real terms: we observe and value everything via its nominal value.

In the hypothetical case of comparing two objects that have the same use (let's say, oranges from X country and orange from Y), we always use its nominal value to determine what to buy.

What could be an example that could convince me that the real value is a useful metric to analyze economic data?

What is the philosophical reason to use real vs nominal value?

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"My difficulty is to reconcile the fact that humans do not think in real terms: we observe and value everything via its nominal value."

Those who do that, suffer from what is called the "money illusion".

"In the hypothetical case of comparing two objects that have the same use (let's say, oranges from X country and orange from Y), we always use its nominal value to determine what to buy."

Indeed, because this is a comparison of two distinct (even if comparable) products, at a single point in time.

Now just answer the following question:

Your wage today is 100 and the price of oranges today is 100/kgr. Tomorrow, the price of oranges will be 200/Kgr and your wage will still be 100. Will your wage tomorrow be the same, as regards what matters, with your wage today?

Certainly, its nominal value will be the same. But what about its real value, i.e. the value in terms of what matters? (how much you can consume, is what matters).

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  • $\begingroup$ Thanks for your response. I certainly didn't ask this question with an ideological bias. This is an honest question. If I would answer your question, I would say my purchasing power diminished from one year to another. I must say I am just a student trying to understand basic economics concepts thoroughly. From my naive point of view, it is counter intuitive to "ignore" the inflation information to make any economic analysis. Sorry, again, I just want to understand the concept very well, even if I risk making stupid questions! $\endgroup$ – gire May 11 '15 at 19:17
  • $\begingroup$ @gire I didn't read any "ideological bias" in your question. $\endgroup$ – Alecos Papadopoulos May 11 '15 at 23:33

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