Real income

economic-dictionary

Real income, or real income, is the amount of goods and services that a person can acquire through their monetary income. Real income shows, therefore, what goods can be purchased with money income.

Real income, therefore, depends on how money income and the price of products or inflation behave. In this sense, if money income rises, but prices remain constant or fall, we would be talking about real income being higher. On the contrary, if prices rise, but money income remains constant, we will be able to buy fewer goods and, therefore, our real income is reduced.

The opposite of real income is nominal income.

In this way, real income takes into account the economic factors that affect our purchasing power.

Difference between real income and nominal income

Real income, as we said, is the exact opposite of nominal income. These are based on the same, on income. But in its measurement, one includes aspects that, in a certain way, condition the income to certain factors that we will now see.

On the one hand, real income is, as we said, the amount of goods and services that a person can acquire with their monetary income. That is, the purchasing power of the person, by conditioning said income to inflation and other factors that affect said power.

While, on the other hand, nominal income is the income flow, but it does not suffer any adjustment conditioned by factors such as inflation, deflation, as well as a series of other factors. This, roughly, measures the amount of income in monetary units.

Another factor that must be taken into account, although we have not mentioned it, is the tax burden. That is, taxes. Although it is true, that its adjustment depends on the concepts of gross and net.

Example of real income

Suppose we receive a salary of $ 3,000.

After taxes, that salary would be reduced to $ 2,100.

Let's imagine that we are going to eat daily at a restaurant, with a menu of 25 dollars.

Due to inflation, the restaurant raises the price of the menu to $ 28.

Although nominal income remains constant, our purchasing power, as the price increases, decreases. This is because, with the same resources, we will be able to eat fewer times than previously, when the menu cost $ 25.

Therefore, we would say that our real income is reduced.

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