I'm Shrijith Venkatrama, the founder of Hexmos. Presently, I am building LiveAPI, a super-convenient engineering productivity tool. LiveAPI processes your code repositories at scale and automatically produces beautiful API docs in minutes.
As I build LiveAPI, I am also making an effort to learn about various economic matters & share it here with you.
In my previous posts I briefly touched upon the ideas of nominal versus real price of commodities. Here are the posts for you to check out:
In this post - I'll go a bit deeper into why the difference matters and also some examples making it clear - how prices work.
What Does It Matter - Whether Price is Nominal or Real?
The nominal price is about the overall labour that is required to produce a given commodity. It is a constant value, and doesn't change over with time (as long as the "inputs" & "methods" remain constant).
Consider the life of a cab driver; in 2014, they earned around $30,000 -per year. For an almost identical effort in 2024, they are more likely to earn something around $40,000.
Since their income shot up from $30,000 to $40,000 within a decade - can we also assert that the value of their work as well went up? Clearly - no. The labour involved is mostly the same - regardless of the year we look at.
Secondly, for the same cab driver - will they live a more prosperous life because their income went up from $30,000 to $40,000? The answer for that too is, No, or unlikely. The reason is - the prices of other commodities also likely have gone up, so they can't afford better commodities with more income.
So - in summary - the nominal price of cab services increased from $30,000 to $40,000 in a year; but the real price didn't! The change in number doesn't mean anything to the cab driver's quality of life - because they cannot consume more or better with the change in the nominal price.
The Value and Price of a Loaf of Bread
Let's look at one more example. The nominal price in the simplest terms is the number on the price tag of the commodity in question, say a loaf of bread.
- In 2000, price tag said $1
- In 2025, price tag says $2
Now the question is: Has loaf of bread become more expensive over time?
Looking only at the nominal price - which is detached from any context (doesn't take into account time/place) - we may wrongly assume - yes.
So - how can we figure out whether the value of something has changed?
We can calculate the real price of a loaf of bread.
The Real Price, Inflation and Consumer Price Index
Various governments and agencies all over the world - track the average price of a basket of goods & services in an economy over time.
These numbers for average prices are collated in Consumer Price Indices
So to compare prices without getting fooled by inflation, we go with the following formula:
Adjusted Price = Original Price x (CPI in Target Year / CPI in Base Year)
In the loaf of bread example, this is the formula:
Adjusted Price in 2025 = Price in 2000 x (CPI in 2025 / CPI in 2000)
Say, these are the CPI values:
- CPI in 2025 = 200
- CPI in 2000 = 100
Then, we get the following calculation:
Adjusted Price in 2025 = 1 x (200/100) = 2
So what the above calculation says is:
$1 in 2000 is equivalent to $2 in 2025
Essentially - the real value for a loaf of bread in both 2000 and 2025 is the same, after adjusting for inflation. That means, a loaf of bread is easy or difficult to get in 2025 as it was in 2000 for an individual.
The CPI rates are different for different countries
A side-note here is that the consumer price index is made by many organizations and governments across the world, but it is generally calculated at the national level.
Prices Differ For Reasons Other Than Inflation
The above two examples clearly demonstrate that prices differ over time due to inflation.
But price is more complex than just that. That's why in the title of this blog post, I have compared price to the many heads of a dragon, which emerges out of the underlying value of a commodity, plus the context (time/place).
Price depends upon:
- Inflation (demonstrated above)
- Supply & Demand (due to local conditions)
- Perceived Value (cultural influences, media, etc)
- Long-Term Play From Large Players in Market
- Political & Social Influences on Setting Price
Many Headed Dragon: Commodities & Services Get Traded For Many Prices
In summary, the key message from the article is that commodities & services have nominal price and real price (or value).
Nominal price can often be misleading because it doesn't take "context" into account.
In particular nominal price doesn't take inflation into account when doing comparison.
Consumer Price Index helps us derive values which can be used to compare prices without inflation misleading us.
However, price differences can emerge due to factors other than inflation as well, and understanding nominal price differences across various times and conditions is an important aspect of studying economics.
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