If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

### Course: AP®︎/College Macroeconomics>Unit 4

Lesson 2: Nominal vs. real interest rates

# Calculating real return in last year dollars

In this video we take a slightly different approach to understanding the difference between real and nominal values: find the value of an asset in a previous year's dollars. Created by Sal Khan.

## Want to join the conversation?

• Will the real return in the current year's money and last year's money always be the same, or was that only the case in this example?
• yes. the only difference between current years money and previous years money is inflation rate. The real return in current year's money is adjusted for inflation, so the real return is equal to the return in previous year's money.
• does last years money have more or less value then this years money?
(1 vote)
• I'll restate your question just so your clear on what I'm answering. I think you are asking: If I earned \$100 last year and kept it in my wallet, would I be able to buy more or less with it if I waited until a year later to spend it.
That depends on how the value of money has changed. Inflation is the reduction in the value of each dollar. So if prices had inflated, you would be able to buy less with your \$100. If prices had deflated, you would be able to buy more with your \$100.
• at I am confused . why sal do x multiply to 1.02 equals 110 .
• If the inflation rate is 2%, then you multiply last year's money by 100% + 2%, or 102%, to get today's money.

102% in decimal form is 1.02.
• could you describe what real return means?
• Yes I can, but Sal does it better.. Watch previous video
• Why do we need to calculate the real return in last year's money?
• When you say "if you believe the whole CPI index" is that implying a lot of goods and services don't increase in price over the years? How real is inflation
• Sal is saying that the basket of goods that the government uses to calculate inflation may not be a good idea for a basket.
• why we multiply 1.02 instead of .02?
(1 vote)
• Because you are trying to find out how much money you have in total, not how much money you earned.
• So what exactly is the formula for calculating the real rate of return?