It is but common for us to hear our parent say "the price of a meal when I came to Bangalore was just 5 paisa, today it is Rs 30/- per plate!" Looks alarming isn’t it?
Hang on! We need to just take a bit of caution. Can we really compare the two? Have everything remained constant?
No! We cannot compare the two, the prices of all the commodities have increased over the year - this is the effect of inflation that has to be factored in. The price of the meal today is the "Current Rupee" or "Nominal Price"; to make any comparison with what was probably 40 year back, we need to have the same standard - we create a common scale for the same. We create this scale and correct today’s price and let them all talk in the same price, we call that the "Real Price" or "Constant Rupee".
The Nominal Price of a good is its absolute price. The Real Price of a good is the price relative to an aggregate measure of prices (i.e. it is adjusted for inflation). The aggregate measure of prices is generally called the "Consumer Price Index (CPI)". The percentage change in the CPI is the measure of inflation.
We would deal more about the CPI as we begin the section on Macro Economics. We dealt with the prices here just for the sake of completion. When we are studying micro-economics through these blogs, we always mean the Real Prices when we mention about price unless explicitly mentioned.
Read in Kannada: http://somanagement.blogspot.com/2011/04/blog-post_07.html
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