How important is real price?

The price we talk about in our daily life is the nominal price, that the money value given to a good or a service; in economics, there is a concept called real price. Real price for one good should always be the same, the change to the nominal price is only caused by inflation or deflation, and the nominal price is the sum of real price and inflation (deflation). Many economists care more about the real terms, such as real GDP, real wage level and etc. To find the real price of a good, we need to trace back to the initial time (t=0). This is why when we want to watch the real GDP change, we need to set a base year.

However, it is impossible to find out the real real price as we do not have the full record of the price change over the history. In addition, such real real price does not have any real meaning. This is because price provides the information about the scarcity in the market, but the scarcity in the market changes over time and the utility people gain from one particular product also changes over time. Many years ago, meat was scarcer than vegetable and people loved eating meat; nowadays, especially in the West, many people like to eat more vegetable to stay healthy and meat is not long as scarce as before. In addition, a basic cell phone that is only able to make calls would deliver greater utility in the past than nowadays as people used to make calls with each other but nowadays we tend to use more social networking applications, such as WhatsApp and Facebook’s Messenger.

To conclude, I think that real price or real GDP only make short term sense as the market scarcity does not change dramatically, but in the long term, the real terms do not make much sense any more.