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Real terms


A variable is 'in real terms' when its value has been adjusted for changes in the purchasing power of money. For example, in order to calculate national income, goods and services are valued at their money prices and these values are aggregated. In order to find how real income has changed over time, i.e. how the physical flow of goods and services has changed, it is necessary to allow for the changes in prices. This is done by deflating by an appropriate index number of prices, and the resulting value constitutes real national income or the national income at constant prices.


Reference: The Penguin Dictionary of Economics, 3rd edt.