Question

A man bought an item for ₹ 12,000. At the end of the year, he decided to sell it for ₹ 15,000. If the inflation rate was 6%, find the nominal and real rate of return.

Hint:

The nominal rate of return does not account for inflation, while the real rate adjusts for inflation to reflect actual purchasing power.

Answer 1

Step 1: The nominal rate of return is calculated using the formula: \[ {Nominal Rate} = \frac{{Selling Price} - {Buying Price}}{{Buying Price}} \times 100. \] Step 2: Substitute the given values into the formula: \[ {Nominal Rate} = \frac{15000 - 12000}{12000} \times 100 = \frac{3000}{12000} \times 100 = 25\%. \] Step 3: The real rate of return is calculated using the formula: \[ {Real Rate} = \frac{1 + {Nominal Rate}}{1 + {Inflation Rate}} - 1. \] Step 4: Substitute the nominal rate \( 0.25 \) and inflation rate \( 0.06 \) into the formula: \[ {Real Rate} = \frac{1 + 0.25}{1 + 0.06} - 1 = \frac{1.25}{1.06} - 1 = 1.179 - 1 = 0.179. \] Step 5: Convert the real rate of return to a percentage: \[ {Real Rate} = 17.9\%. \]