Briefly discuss the differences in price behavior over 40 years between the two series (nominal price & inflation adjusted price)
The correct answer and explanation is:
Correct Answer:
Over a 40-year period, nominal prices typically show a steady increase, while inflation-adjusted (real) prices tend to fluctuate more, reflecting true changes in market value after accounting for inflation. This means that nominal prices often rise simply due to inflation, whereas real prices provide a more accurate picture of the actual purchasing power or value of the commodity or good.
300-Word Explanation:
When analyzing price trends over a 40-year period, it is important to distinguish between nominal and inflation-adjusted (real) prices.
Nominal prices are the actual prices paid at the time, not adjusted for inflation. They reflect the face value and do not account for the changing value of money. Over several decades, nominal prices usually increase steadily due to the cumulative effect of inflation. For example, if a product cost $1 in 1985, and $3 in 2025, that rise might mostly be due to inflation rather than an actual increase in the product’s value or cost of production.
In contrast, real (inflation-adjusted) prices remove the effects of inflation and express values in constant dollars, usually based on a base year. This adjustment allows us to compare purchasing power over time. Real prices are more likely to fluctuate up and down, reflecting actual supply and demand, market conditions, technology changes, or other economic factors. In some cases, the real price may even decrease, even if nominal prices are rising, if inflation is growing faster than the price itself.
For instance, the nominal price of gasoline might appear to triple over 40 years, but when adjusted for inflation, the real price may show a different trend—rising and falling with oil markets, geopolitical events, or alternative energy competition.
In conclusion, nominal prices mostly show general upward trends due to inflation, while real prices offer a clearer, more variable picture of true economic value and affordability over time.