# Real and nominal return | Inflation | Finance & Capital Markets | Khan Academy

Last year I Suppose you put \$ 100 in some savings account. This is from last year Exactly one year later From \$ 100 to \$ 110 This is what I mean now So if you look at this money in dollars only It has increased by \$ 10 So I made \$ 10 on my initial \$ 100 capital So I get 10% profit But I think Did this investment really pay off? What can I buy for this \$ 110? Compared to what you could buy for \$ 100 before. Compared to what I was able to buy with this money last year, I really like my products and services Can I buy 10% more today? Think about it Let's think about it. Last year and this year Rough inflation rate Inflation is 2% a year later Let's say it went up. If only this would happen What happened to \$ 100 last year and today? Well done! If the inflation rate is 2% And a year later, the equivalent of \$ 100 You can buy it today for \$ 102 So that's going to be \$ 102 So how much would you be prepared to pay for all those benefits to your life? How much is the current value (value) today? What is the current purchasing power (value for money to purchase a product or service per year)? Well done! We ….

I got \$ 110 And we're going to invest that money in \$ 102 today If we look at money today We invest in something that we can get back At \$ 102, today's purchasing power is the same. And now we have the purchasing power of \$ 110 So you can buy it for \$ 8 today I got more So what is the actual return on investment? Let me write it down.

Real return And today we can do it financially In any case, we were able to do it One year later, I was able to pay back the \$ 110 discount And calculate the actual return there And then we're going to calculate the actual return on dollars Calculate Or you can calculate with today's money And in the next video I will probably do the same thing But the real return is We make \$ 8 a year In terms of money today …. And we's the first investment in money today \$ 102 …. Once that is done, we have developed a calculator Dividing 8 by 102 gives you 7.8 percent This is equivalent to 7.8% This is a nominal profit, though At the exchange rate for what we invested Looking back at what we got Even if the nominal return is 10% Because there was 2% inflation Our actual purchasing power increased by only 7.8%..