In economics, we usually differentiate between nominal and real variables.

This is important to answer questions like...

Are the standards of living improving with time?
Did our grandfathers earn in their first job more or less than we do?
A nominal variable is a variable that has not been adjusted
for changes in prices over time, while real variables are adjusted for such
changes.
If we observe that the nominal variable (like wages)
is higher today than what it was ten or fifteen years ago,
we are not sure if the purchasing power of wages increased
because it may be the case that prices increase even more than
the nominal wages. For instance, if the wage of a worker in Spain
increased at twenty five percent between 2001
and 2016 but prices also increase in that period,
we do not know if the quantity of goods and services that the
worker is able to buy has increased or not.
For comparing the purchasing power of wages across time
we need to transform the nominal wage into the real wage by
using a price index like the CPI. For instance, if we want to put
wages of 2001 in euros of 2016
we can use the following formula: the real wage of 2001
expressed in euros of 2016 is obtained
multiplying the nominal wage of 2001
by the price index in 2016 and dividing
by the price index of 2001.
Let's imagine that the Spanish price index in 2001
was one hundred and in 2016 was
one hundred and thirty six. Suppose also that the nominal wage
in 2001 was two thousand euros.
Applying the formula, we can get the real wage of 2001
in 2016 euros. So, the purchasing power of wages
in 2001 was equivalent to two thousand seven hundred
and twenty euros in 2016.
If the nominal wage in 2016 was
two thousand five hundred (an increase of twenty five percent)
the purchasing power in 2016 is lower than in 2001.
Two last points about the transformation of nominal variables
into real variables.
First, when we want to compare variables across time,
we want to exclude the kind of illusion that inflation produces:
an increase in nominal variables is not very informative if prices are also
increasing. So, most of the time, economic analysis
is based on real variables. Second, given that there are several price
indexes (the CPI and the GDP deflator are the most prominent examples)
the transformation of nominal
into real variables should be obtained with the "right" index.
Right, in this case, means that the basket that it is used
in the elaboration of the index should be similar to the goods
that are implicitly related to the nominal variable:
for instance, for nominal wages the CPI is the
adequate index. For variables from the national accounts, like
the GDP, a good choice is the GDP deflator. But, if you want to analyze
a variable like imports, then a specific price index elaborated
with a basket of imported goods will be preferable.
The distinction between nominal and real magnitudes is a powerful
tool that you will require for the analysis of the evolution
of any economic variable across time.