Real Versus Nominal Returns.
The Costaguanan stock market provided a rate of return of 95 percent. The inflation rate in Costaguana during the year was 80 percent. In the United States, in contrast, the stock market return was only 12 percent, but the inflation rate was only 2 percent.
Which country's stock market provided the higher real rate of return?
C: 95-80=15
USA: 12-2=10
To determine which country's stock market provided the higher real rate of return, we need to compare the nominal returns adjusted for inflation.
First, let's calculate the real rate of return for Costaguana:
Nominal Rate of Return for Costaguana = 95%
Inflation Rate for Costaguana = 80%
Real Rate of Return for Costaguana = Nominal Rate of Return for Costaguana - Inflation Rate for Costaguana
Real Rate of Return for Costaguana = 95% - 80% = 15%
Now, let's calculate the real rate of return for the United States:
Nominal Rate of Return for the United States = 12%
Inflation Rate for the United States = 2%
Real Rate of Return for the United States = Nominal Rate of Return for the United States - Inflation Rate for the United States
Real Rate of Return for the United States = 12% - 2% = 10%
Comparing the real rate of returns, we can see that the stock market in Costaguana provided a higher real rate of return (15%) compared to the United States (10%). Therefore, the stock market in Costaguana provided the higher real rate of return.
To determine which country's stock market provided the higher real rate of return, we need to consider the impact of inflation on the nominal returns.
Nominal Returns: The nominal return is the actual rate of return on an investment without considering the effects of inflation.
Real Returns: The real return is the rate of return adjusted for the effects of inflation. It tells us the actual increase in purchasing power resulting from an investment.
To calculate the real rate of return, we subtract the inflation rate from the nominal return.
In the given scenario:
- Costaguana Stock Market: Nominal return = 95%, Inflation rate = 80%
- United States Stock Market: Nominal return = 12%, Inflation rate = 2%
Now, let's calculate the real rate of return for each country.
Costaguana:
Real return = Nominal return - Inflation rate
Real return = 95% - 80% = 15%
United States:
Real return = Nominal return - Inflation rate
Real return = 12% - 2% = 10%
Comparing the results, we can see that Costaguana's stock market provided a higher real rate of return of 15%, while the United States stock market provided a real rate of return of 10%.
Therefore, in this scenario, Costaguana's stock market provided the higher real rate of return.