What's the proper usage of "real terms"?

[unbeliever]

We get a lot of talk about whether or not something has gone up "in real terms".

This is a highly ambiguous term.

 

It always used to mean that it had gone up correcting for inflation. But there is no one measure of inflation and there is sector-specific inflation which may be higher.

There's percentage of GDP, but then why should spending on everything always be the same percentage of GDP? Just because the economy has grown doesn't mean that everything we do has to grow with it.

 

Of course none of this accounts for an increase in demand due to long term trends that do not show up in inflation. Such as a naturally-driven increase in demand.

 

Myself I would favour correcting for sector-specific inflation and measuring per capita rather than in total. Do I hear a second?

[Obelix]

We get a lot of talk about whether or not something has gone up "in real terms".

This is a highly ambiguous term.

 

No it's not ambiguous at all and it's disingenuous to suggest otherwise. It has a specific meaning and it used to make comparisons for change in price whilst accounting for the underlying price inflation.

[unbeliever]

No it's not ambiguous at all and it's disingenuous to suggest otherwise. It has a specific meaning and it used to make comparisons for change in price whilst accounting for the underlying price inflation.

 

I've heard it used several times in the commons, by opposition MPs, to mean as a percentage of GDP. The term is evolving and you need to watch out for alternative uses. I always ask for clarification when I hear it.

[Obelix]

I don't need to "watch out" for anything apart from people perhaps trying to use it incorrectly.

 

A price given in "real terms" should always reference the basket index that is used to calculate the correction and the base year that it is measured against. Absent this it's usually possible to assume what is meant - for pricing of consumer goods it will be the CPI for example. Absent an obvious choice you need to ask or determine whats meant.

 

You are trying to fix a problem that doesn't exist.

[sgtkate]

Doesn't it just mean inflation adjusted to whichever period of time you are referring to?

[biotechpete]

It's pretty clear what the term means, it's an inflation adjusted figure. In government terms, we know it's CPI inflation, the ONS' preferred measure.

 

Having all the statistics does make a more complete picture. To me, the real-terms spending figure is most meaningful in assessing whether spending on services is increasing or decreasing in relation to what money is generally worth in the UK. The GDP and per capita comparisons are useful in assessing whether the UK is spending more of less than another country and whether the proceeds of growth are being distributed more or less.

 

Sector specific inflation is more open to fiddling, I would think, by how you choose what to include. Although in terms of government spending, I could see why inclusion or exclusion of housing costs for example might a 'better' measure for certain aspects of spending