The real discount rate (r) approximately equals the nominal discount rate (i) minus the expected rate of inflation (m), and is calculated as:

A common approach to estimation the expected rate of inflation is to assume that real long-term bond yields will remain stable and to deduct this yield from the current long-term bond yield. If the yield on current long-term bonds is seven percent and the real long-term bond yield has been about three percent, the expected rate of inflation would be four percent. The real yield would be calculated over a time period approximately equal to the expected term of the project impacts.

Many suggest that a discount rate calculated purely on market values is inappropriate to use when considering public expenditures and argue that we should use a

A common approach to estimating the expected rate of inflation is to assume that real long-term bond yields will remain stable and to deduct this yield from the current long-term bond yield. If the yield on current long-term bonds is seven percent and the real long-term bond yield has been about three percent, the expected rate of inflation would be four percent. The real yield would be calculated over a time period approximately equal to the expected term of the project impacts.

Many suggest that a discount rate calculated purely on market values is inappropriate to use when considering public expenditures and argue that we should use a social discount rate. There is reason to believe that we value the time preference of money as individuals differently than we should as a society. The argument is that individuals view the opportunity cost of foregoing current consumption as much higher than should society, resulting in higher discount rates that discourage long-term investment (thus our current low rate of aggregate savings). Because of concern for future generations, the obligation to consider the general welfare of the citizenry, and the imperfections of markets, it is often said the social discount rate should be lower than the market discount rate. Others view these arguments as paternalistic and unconvincing, preferring something closer to a market discount rate (Rosen, 1985).