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true increase that we've seen in GDP that year. So guys

for you and actually makes you understand why most economists

may you have may not be able to buy as much as it did before.

flaunt and say oh yes our GDP has increased they will look at

thing as what we've just seen with the interest rates. The

to GDP you're talking about gross domestic product that's

nominal because they'll say oh yes this how much has increased

real GDP data actually factors in that inflation and shows the

without factoring in inflation. But in reality it's the same

please take notes as particularly this lesson this

concept as GDP data. So you've got real GDP data and then

nominal interest rate. So guys take care and I'll see you in

interest rates are increasing so in case you are struggling

much we can actually make from the interest. It's the same

example right here. I really hope this does break it down

actually look at just the real interest rate rather than the

means in actuality your $10$5, 000 is actually own can only

need to look at how much inflation has gone up by to

quite attractive when this deflation occurring that means

the productivity of an economy. Um So now an economy might to

you've got the nominal GDP data. Of course when it comes

Let's just say inflation went up to by 3% that year. That

will affect your purchasing power of course. The money you

to grasp the concept because it can be a bit complicated at

going through you buy a bond and on its front cover it says

a real interest rates to get a proper understanding of how

the listed amount of years. Let's say after one year, it's

now worth $105, 000. But think about it, is it really? You

calculation of the real interest rate. Now let's look

buy 1 03 thousand hundred and 3000 dollars of products from

that this bond will will mature 5% a year so you buy this bond

at $a 00thousand which will exploit which will expire in

first let's just use the example that I'm going to be

the previous year. Now this is why we look at interest rates,

understand your purchasing power. Now because of this, it

there we go if inflation is lower and you're calculating

Of course like like we mentioned previously bonds are

higher that means that the real interest rate reduces in price.

much is got how much prices valued or devalued in that

looking back at that as well that means if inflation rate is

you're in an inflationary condition that means inflation

means that you're going to have a higher real interest rate

Investors will make smart assumptions to understand if

at the two different conditions where you would actually

it's a good investment. Let's look back at this equation. If

inflation is obviously higher therefore you get a lower real

inflation is a lot lower therefore higher real rates so

the real interest rate let's just keep this standard that

rate so look for a better investment elsewhere obviously

therefore it's good to invest into that bond however if

year.

the investment into the bond for is actually worth it and if

inflation is lower that means

So why do investors care about the real interest rate?

it will make a good return on investment through the

consider buying that bond. So in a deflationary condition

bond. Um the interest rate the inflation rate is of course how

value that's the the front cover let's just say of the

would have seen last year. It's actually only 7. 5%. So if we

one year. However, due to the economic you know the economy

So the nominal interest rate is the one that you see on face

rate is the nominal interest rate minus the inflation rate.

increased in value by 10% and that's what you'd be paid back

it's it says it by whether it be 30 years whatever it may be.

context. So the real interest rate. Think of it like this.

what does that mean? That means although your bond has

at the time inflation at in that year was 2. 5 percent. So

Imagine a bond has a 10% nominal yield but the inflation

the actual purchasing power of that isn't the 10% that you

were to put that into an equation. The real interest

that bond is going to increase by 10% year on year whenever

that has a real interest rate of only 7. 5%. So what does

So it says ten percent but let's just say it's 10% within

this mean? That bond on the face value it says that your

but the inflation rate is 2. 5 percent. Then you have a bond

learning about these things. But just to put it into

course it was like that for me as well when I was originally

then the effective interest rate is it includes the impact

has been redeemed. Nominal interest rate. The nominal

the real interest rate accounts for inflation. Given a more

is what a lot of economists use especially in their data. So

lenders without accounting for any other economic factors. And

compounds semenually. Increasing the overall return.

is what you're going to be hearing a lot in the news. This

So this might sound a bit confusing at first and of

of compounding in which a bond might pay interest annually but

interest rate or coupon rate is the actual price borrowers pay

depth and understand the different types of interest

obviously translate that into GDP. So the real interest rate

precise reading of a borrowers buying power after the position

interest rates and GDP but it's going to be a lot more in in

So we're going to be looking at interest rates first and then

rates and GDP of course.

going to be building up upon everything we've learned about

Yes guys welcome to the next lesson. So in this lesson we're

the next video.