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