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### Course: Macroeconomics>Unit 4

Lesson 2: Nominal v. real interest rates

# Nominal interest, real interest, and inflation calculations

While the nominal interest rate is the agreed upon percentage that someone will pay back on a loan, the real interest rate accounts for inflation and gives a more accurate representation of the actual value of the loan over time.

## Want to join the conversation?

• Hi, @ min in the video, we arrive at the number 1.0294. Could you please explain the calculation that led you to arrive at the value of 2.94% (the real interest rate)? The video does not explain that step. Thanks!
• We calculate a 5% interest rate as 1.05 (the original amount + 5%) we can infer that the same goes for the 1.0294 which is the original amount + 2.94%. In other words, subtract by 1 Then multiply by 100 to get the real interest rate.
• Why do we divide the nominal interest rate by the rate of inflation? what does it mean by the rate of inflation being multiplied by cost?
(1 vote)
• Recall that inflation is a increase in the price level of goods (such as the CPI). Therefore, the rate of inflation multiplied by the cost is the purchasing power of the initial investment when you get the money back, in this case, after one year. Instead of calculating the real return, we are calculating the real interest rate which is the real return +1. For example:
100×1.05/100×1.02. The 100's cancel each other out and we are left with 1.05/1.02=1.0294. The real return is (105-102)/102=0.0294. In other words, finding real return and real interest rate are more or less the same thing. The real interest rate is a multiplier and the real return is how much the purchasing power of the original investment has increased.
(1 vote)
• How to know inflation rate from GDP deflator
(1 vote)
• The GDP deflator is (nominal GDP/real GDP) x 100, and it tells you how much inflation is. For example, if nominal GDP is \$105 and real GDP is \$100, then inflation is 5%.
(1 vote)
• How to know the calculations of nominal interest, real interest and inflation?
(1 vote)