Question

What is the difference between REAL and NOMINAL income?

Answer 1

Real Income:

• Reference to monetary income subsequent to the deduction or accounting for the effect of changes in the level of price or inflation.
• Implication towards the amount of goods and services buyable by the nominal income for us.

Nominal Income:

• Implication to monetary income prior to the deduction or accounting for the changes effect in the level of price or inflation.
• Illustrations include nominal income such as salary and interest income from our saving accounts.

Step-by-step explanation:

REAL INCOME VERSUS NOMINAL INCOME

Three Scenarios:

1. Increase in the Real income if nominal income rise is faster beyond general price.
2. Decrease in the Real income if nominal income is not experiencing any rise as quicker as inflation.
3. No increase in the real income if both nominal income and general price level simultaneously rise at the similar level.

Impact:

• Only when real income is raised beyond nominal income, then only there can be an increase in the purchasing power.
• The real income is indicative to us of our actual spending capacity whilst nominal income just elucidates us the monetary amount received by us either as salary or business profit.