TBL-CBA Traps #10: Mixing Nominal and Real

by | Jun 4, 2018 | Economics, Sustainability

Number 10 in our TBL-CBA traps series (and the last one).

10. Mixing Nominal and Real

All the costs, benefits and discount rate should be either in nominal (current year) dollars or real (constant) dollars. Don’t mix real dollars and nominal discount rates or vice versa. Most economists recommend being real and staying real (man). That said, the preference for real/constant dollars is more convention than recommendation. In financial analysis, when cash flow is the primary concern, costs and benefits are usually estimated in nominal dollars with forecasts of specific price indices used for the inputs. Cost benefit analysis, on the other hand, usually shies away from forecasting individual prices and assumes that they all increase at the general rate of inflation. So, while CBA uses real and financial analysis nominal, make sure your discount rate matches your preference.

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