Real Deficit

There’s the nominal deficit, and there’s the real deficit. Two peas in a pod.

The nominal deficit, like nominal prices, are the actual dollar numbers we see. If a country raised $10 billion in taxes but spends $15 billion, then it has a $5 billion nominal deficit.

The real deficit is the nominal deficit minus inflation. Inflation matters, because it determines how much value you can buy per dollar. Back in the day, you could buy a lot with a dollar. Today, a dollar is increasingly worth less and less...because of inflation.

If that country has a $5 billion nominal deficit, what’s the real deficit? If we divide the nominal deficit by the percent change in prices, we’ll have it. If inflation was around 2%, then that $5 billion in real terms from a year ago is now over $5.1 billion.

Yep, as dollars are worth less and less, you’ll need more and more of them to pay that debt back...assuming the deal took inflation into account.