Is There Any Competition Between Real And Nominal Interest Rates?

The interest rates are measured in dollar or nominal terms and not in terms of trees or wine or cars. Interest is the yield on an investment measured in dollars per year per dollar of investment. But dollars can become distorted yardsticks. The prices of fish, tress, wine, and other goods change from year to year as the general price level rises due to inflation. We therefore need to find a real return on capital, one that measures the quantity of goods we get tomorrow for goods forgone today.
As an example, say that you invested 1000 pesos in a Mexican bond in 1995. Because you were offered 70 percent interest rate, you might have looked forward to getting a hefty return, ending up with 1700 pesos at the end of the year. But when you later took your money out to buy some consumer goods, you find that prices had risen 65 percent during 1995. In terms of the real quantity of goods, you could actually buy only 3 percent more than you could have bought at the start of the year. In other words if you were to lend 1000 market baskets of goods at the beginning of 1995, you could obtain only 1030 market baskets of goods the following year. The difference between real and nominal interests rates is particularly dramatic during periods of high inflation.