It's *real* easy

In 1950 a mars bar cost 3 cents.

In 2004 a mars bar costs 30 cents.

In NOMINAL terms the price of a mars bar has risen by 10-fold (1000%!!) oh my goodness, what a crazy world we live in.

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In 1950 a mars bar cost 30 cents in 2004 prices.

In 2004 a mars bar cost 30 cents in 2004 prices.

In REAL terms the price of a mars bar is UNCHANGED (0%) oh my goodness, what a... *boring* world we live in!!! BAD TV!!!

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look at the 2 charts on this web-page:

http://www.zealllc.com/2004/goldoil3.htm

on the first chart you will see that NOMINAL crude oil prices are far far higher today than they were in 1975.

on the second chart you will see that REAL crude oil prices are EXACTLY the same as they were in 1975.

In other words,
the nominal price of goods (such as oil and mars bars) has been rising year-on-year. At the same time, the real price of goods (such as oil and mars bars) has remained the same.

In some other words:
the intrinsic value (the scarcity, the quality, the perceived value) of goods (such as oil and mars bars) doesn't change.

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REAL prices matter.
NOMINAL prices don't matter.

People don't understand REAL prices.
People do understand NOMINAL prices.

Why?

If you pay for something you want to know HOW MUCH to pay for it; how much to take from your wallet or bank account or credit card. if the price of something is rising you think you are paying more for it.

Every day the newspapers and tv talk about rising prices. The price of oil is rising, the price of mars bars is going up, the price of a car is going up etc. etc. It is far more complicated for people to calculate the proportion of their annual income they spend on something, especially mars bars and oil. Cars, maybe.

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So as long as NOMINAL prices will matter to people and REAL prices won't, the confusion and concerns over RISING PRICES will persist and all the understanding we have of these concepts will go to waste.

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