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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