2/2014 http://www.business-spotlight.de 61H
ow would you feel if you deposit-
ed€1,000 with your bank and
were told that, in a year’s time, it
would be worth only €990? Or here’s
another question, which may seem
even sillier: would you prefer a one per
cent pay increase or a five per cent pay
increase?
In fact, the only good answer to both
questions is, “it depends”. Or, if you
want to use some Latin — which econ-
omists like — you could say: “Ceteris
paribus[all other things being equal],
I’d be angry with the bank for reducing
the value of my savings and I’d prefer
a five per cent pay rise.”
The problem is that all other things
are rarely equal. Specifically, in the two
cases above, we need to know what is
happening to prices.
In the first case, the nominal valueof
your savings has fallen by one per cent
(€10) over the year. In other words,
there is a negative nominal interest rate
— of minus one per cent. But what
should interest you (forgive the pun) is
not the change in the nominalvalue of
your savings but the change in the real
value, or purchasing power. To find
this, we have to adjustthe nominal in-
terest rate for price inflation:Real interest rate =
nominal interest rate – inflation rateFor example, if the nominal interest
rate is minus one per cent, and prices
are falling by three per cent a year, the
real interest rate would be positive, at
two per cent, which is not bad.
A similar argument applies topay
rises. A nominal increase of five per
cent is clearly better, ceteris paribus,
than a one per cent increase. But again,
we need to know what is happening to
prices, as it is the realchange in pay
that decides our purchasing power:Real pay increase =
nominal pay increase – inflation rateTALKING FINANCE LANGUAGEIf prices are stable, a one per cent
nominal pay increase is also a one per
cent real wage increase (a one per cent
increase “in real terms”). But if prices
are rising, say, by six per cent, a five per
cent nominal increase in wages means
a real wage decrease of one per cent.
Negative changes in nominal pay are
not uncommon (we usually call them
“pay cuts”). Negative nominal interest
rates are more unusual. But the US and
eurozone central banks have consid-
ered negative interest rates for the
money that banks keep on depositwith
them. The idea would be to encourage
banks to lend this money to firms rather
than see its nominal value fall.
But the important thing for us all is
not to be blindedby changes in nomi-
nal values. Instead, look at what is hap-
pening to prices — and get real!Eine Erhöhung der Zinsen oder des Gehalts bedeutet nicht unbedingt,
dass man effektiv mehr Geld hat, wie IANMCMASTERerklärt.It’s time to get real
advancedadjust sth. [E(dZVst] etw. angleichen,
korrigieren
apply to sth. [E(plaI tu] für etw. gelten
blinded: be ~ geblendet werden;
[(blaIndId] hier: sich täuschen
lassen
deposit money with sb. Geld bei jmdm.
[di)pQzIt (mVni wID] einzahlen
get real sich nichts vor-
[)get (rIEl]ifml. machen
in real terms effektiv
[In (rIEl t§:mz]
keep money on deposit Geld als Einlage
[)ki:p )mVni Qn di(pQzIt] halten
nominal interest rate Nominalzinssatz
[)nQmIn&l (IntrEst reIt]
nominal value Nominal-,
[)nQmIn&l (vÄlju:] Nennwert
pay cut [(peI kVt] Gehaltskürzung
pun [pVn] Wortspiel
purchasing power Kaufkraft
[(p§:tSEsIN )paUE]
real interest rate Realzinssatz
[)rIEl (IntrEst reIt]
silly[(sIli] dumm, lächerlichMore or less? Things are not
always how they seemWavebreak Media■BS
Ian McMasteris editor-in-chief of Business
Spotlight. Read his weekly blog on global
business at http://www.business-spotlight.de/blogs
Contact: [email protected]“Is a five per cent pay rise always
better than a one per cent rise?”61 Financial English 2_14 17.01.14 12:11 Seite 61