Real income is the income of individuals or nations after adjusting for inflation. It is calculated by subtracting inflation from the nominal income. Real variables, such as real income, real GDP, and real interest rate are variables that are measured in physical units, while nominal variables such as nominal income, nominal GDP, and nominal interest rate are measured in monetary units. Therefore, real income is a more useful indicator of well-being, since it is based on the amount of goods and services that can be purchased with the income. According to the classical dichotomy theory, real variables and nominal variables are separate in the long-run, meaning they are not influenced by each other. In other words if the nominal starting income was 100 and there was a 10% inflation (general rise in prices e.g.: what cost 10 now costs 11) rate. So now with 100 you can buy less and if your income is not adjusted by inflation (did not rise by 10%),your real income has dropped 10%.
Famous quotes containing the words real and/or income:
“Avarice, the spur of industry, is so obstinate a passion, and works its way through so many real dangers and difficulties, that it is not likely to be scared by an imaginary danger, which is so small that it scarcely admits of calculation.”
—David Hume (1711–1776)
“Italy is such a delightful place to live in if you happen to be a man. There one may enjoy that exquisite luxury of Socialism—that true Socialism which is based not on equality of income or character, but on the equality of manners. In the democracy of the caffè or the street the great question of our life has been solved, and the brotherhood of man is a reality. But it is accomplished at the expense of the sisterhood of women.”
—E.M. (Edward Morgan)