The nominal and real interest rate is ... The level of real interest rates

The most important characteristic of the modern economyis the depreciation of investment through inflationary processes. This fact makes it expedient to apply not only a nominal, but also a real interest rate when making certain decisions in the loan capital market. What is the interest rate? What does it depend on? How determine the real interest rate?

The concept of interest rates

The interest rate should be understood as the most importantThe economic category that reflects the profitability of an asset in real terms. It is important to note that it is the interest rate that plays a decisive role in the process of making managerial decisions, because any subject of the economy is very interested in obtaining the maximum level of revenue with minimal costs in the course of its activities. In addition, every entrepreneur, as a rule, reacts to the dynamics of the interest rate in an individual way, because in this case the determining factor is the type of activity and industry, in which, for example, the production of a particular company is concentrated.

Thus, owners of capital assetsoften agree to work only under the condition of extremely high interest rates, and borrowers are likely to acquire capital only in the case of low interest. The examples considered are clear proof that today it is very difficult to find a balance in the capital market.

Interest rates and inflation

The most important characteristic of a market economyis the presence of inflation, which causes the classification of interest rates (and, of course, the rate of return) on the nominal and real. This allows you to fully evaluate the effectiveness of financial transactions. In case of excess of the inflation rate in relation to the interest rate received by the investor for investments, the result from the corresponding operation will be negative. Of course, in terms of absolute value, its funds will increase significantly, that is, for example, in rubles it will have more money, but the purchasing power, which is characteristic of them, will drop significantly. This will lead to the possibility of a new amount to buy only a certain amount of goods (services), less than it would have been possible before the beginning of this operation.

Distinctive features of nominal and real rates

It turned out, nominal and real interest rate differ only in terms of inflation ordeflation. Under inflation, one should understand a significant and sharp increase in prices, and under deflation - their significant decline. Thus, the rate that is designated by the bank is the nominal, and the real interest rate is purchasing power inherent in income and denoted as a percentage. In other words, the real interest rate can be defined as nominal, which is adjusted for the inflation process.

Irving Fisher, an American economist, formed a hypothesis explaining how real interest rate from nominal. The basic idea of ​​the Fisher effect (the so-called hypothesis) is that the nominal interest rate has the property of changing so that the real one remains "fixed": r (n) = r (p) + i. The first indicator of this formula displaysnominal interest rate, the second - the real interest rate, and the third element is equal to the expected rate of inflationary processes, expressed in percentage terms.

The real interest rate is ...

A vivid example of the Fisher effect considered inthe previous chapter, can serve as a picture when the expected rate of the inflationary process is equated to one percent in an annual ratio. Then the nominal interest rate will also increase by one percent. But in fact the real percentage will remain unchanged. This proves that the real interest rate is the same nominal interest rate, but minus the estimated or actual inflation rate. This rate is fully cleared of inflation.

Calculation of indicator

The real interest rate can be calculated as the difference between the nominal interest rate and the level of inflationary processes. In this way, the real interest rate is following relation: r (p) = (1 + r (n)) / (1 + i) -1, where the calculated indicator corresponds to the real interest rate, the second unknown member of the ratio determines the nominal interest rate, and the third element characterizes the inflation rate.

Nominal interest rate

In the process of talking about credit rates, as a rule, we are talking about real rates (the real interest rate is purchasing power of income). But the fact is that they can not be observed directly. Thus, when concluding a loan agreement, an economic entity is provided with information on nominal interest rates.

Under the nominal interest rate, theto understand the practical characteristics of interest in a quantitative way, taking into account the actual prices. At this rate, a loan is issued. It should be noted that it can not be greater than zero or equal to it. An exception is a loan on terms of free. The nominal interest rate is nothing more than a percentage expressed in monetary terms.

Calculation of the nominal rate of interest

Assume, in accordance with the annual loan inTen thousand monetary units are paid 1200 monetary units as a percentage. Then the nominal interest rate is equal to twelve percent per annum. After receiving a loan of 1,200 monetary units, will the lender get rich? Competently answer this question can only be accurately knowing how the prices during the year will change. Thus, with annual inflation equal to eight percent, the creditor's income will become more only by four percent.

The nominal interest rate is calculated as follows: r = (1 + percentage of income received by the bank) * (1 + inflation rate increase) - 1 or R = (1 + r) × (1 + a), where the main indicator is the nominal interest rate, the second is the real interest rate, and the third is the inflation rate in the corresponding country calculations.

conclusions

Between the nominal and real interest rates there is a close relationship, which for the sake of absolute understanding, it is advisable to present as follows:

1 + nominal interest rate = (1 + real interest rate) * (price level at the end of the time period under review / price level at the beginning of the time period under consideration) or 1 + nominal interest rate = (1 + real rate of interest) * (1 + rate of inflationary processes).

It is important to note that the realthe productivity of transactions made by the investor reflects only the real interest rate. It speaks of the increase in the purchasing power of the funds of this economic entity. The nominal interest rate can only reflect the amount of cash flow in absolute terms. It does not take inflation into account. Increase in real interest rate speaks about the growth of the level of purchasing powermonetary unit. And this is an equal opportunity to increase consumption in future periods. Hence, this situation can be treated as a reward for current savings.