The Difference Between Nominal Income And Real Income

February 7th, 2009 Comments off
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Inflation has a strong impact on our monetary income. Monetary Income can be described as Nominal Income and Real Income.

Below tabulate the differences between nominal income and real income and the impact:-

Nominal Income:

  • Monetary income before the deduction or accounting for the effect of changes in the price level or inflation.
  • Examples of nominal income like salary and interest income from our saving accounts

Real Income:

  • Monetary income AFTER the deduction or accounting for the effect of changes in the price level or inflation
  • It tell us what are the amount of goods and services that the nominal income can buy for us.

Nominal Income Versus Real Income

Three Scenarios:

  1. Real income increases ( say by 2%) if nominal income(say 10%) rises faster than general price.( 8% )
  2. Real income decreases ( say by 3%) if nominal income( say 7%) does not rise as fast as inflation (10%)
  3. Real income –no increase if both nominal income(say 7%) and general price level (say 7%) both increases at same level

Impact:

·        Only when real income increase more than nominal income, then only our purchasing power increases.

·        The real income tells us our actual capacity to spend while nominal income only tell us the amount of dollar that we have received either as salary or business profit

 

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Financial Accounting

 
 

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