The general rule in economics is that the value of money today will not be equal to the same amount of money in the future. Also known as the time value of money, this is a central concept in finance theory, which takes into account factors such as interest rates and inflation. When calculating returns over time, it is important to keep this in perspective and know the difference between nominal returns (returns on paper) and real returns (adjusted for today’s purchasing power) differ. How can you tell the difference and what factors should you keep in mind? Salman Khan of the Khan Academy explains.
From the first video, you’ll understand:
- How to compare real and nominal returns
- The method to calculate real returns, given inflation
From the second video, you’ll understand:
- How to calculate returns for money invested in a previous period
- The factors that enter into real return calculations