Because NLU’s all about the lifelong pursuit of knowledge, if only for knowledge’s sake.
This is one of many economic fundamentals I consistently can never quite remember. So if only for my own edification, and perhaps maybe any of you who struggle with this distinction, I present the following example in hopes of finally cementing this shit once and for all (hang with me here):
Let’s say a golfer–what the heck, let’s make him a former Masters champion. Our proud Masters champion is getting back into the flow of a new PGA Tour season like any other year; playing an early-season, West Coast birdie bonanza as it were.
Now this particular tournament happens to occur on some of the easiest tracks this (or any) professional will encounter all year. Our pro promptly struggles, to put it delicately, in his first round, shooting a seven-over, 79 on a course that will yield a cumulative scoring average about ten shots lower on the week.
Let’s now discuss this performance using our economic terms, ‘real’ and ‘nominal.’
The rough relationship we will want to always remember is nominal amounts (be they interest rates, wages, values, or golf performances) are expressed without accounting for inflationary influences (i.e. inflation rates), whereas real amounts are expressed with inflationary effects factored in.
For our example above, the equation we will apply mirrors that used to calculate real vs. nominal wages.
Nominal performance = Real performance * (1 + [% Change in Difficulty over Base Course])
So to conclude, in our example we would express the Green-jacket winner’s performance, nominally, as a seven-over, 79.
In real terms, having applied the necessary, significant increase in course difficulty (based on the relative strength of the courses he will encounter the rest of the season), we can best express our pro’s performance as…
Aerial view of LQCC following Immelman’s round
*Note: Actually doing the math here will produce a ‘real’ golf score, in absolute terms, less than 79. We’ve exercised an artistic license a little bit. If we’d been discussing wages, lower would equal ‘worse.’ Obviously golf performance is not oriented in a similar manner.