Real income

The income of an individual or group after taking into consideration the effects of inflation on purchasing power. For example, if you received a 2% salary rise over the previous year and inflation for the year was 1%, then your real income only rose 1%. Conversely, if you received a 2% raise in salary and inflation stood at 3%, then your real income would have shrunk 1%. Also known as "real wages".

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In other words, real income refers to the amount of goods and services you can buy today compared to the price of the same goods and services you could have purchased in another time period. For example, if it costs you $2,000 more to purchase the same amount of goods and services (i.e. food, gas, rent, utilities, interest, etc) this year compared to last year, and your annual income stayed the same, then your REAL income has actually decreased by $2,000.

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Income of an individual, group, or country adjusted for changes in Purchasing Power caused by inflation. A price index is used to determine the difference between the purchasing power of a dollar in a base year and the purchasing power now. The resulting percentage factor, applied to total income, yields the value of that income in constant dollars, termed real income. For instance, if the cost of a market basket increases from $100 to $120 in ten years, reflecting a 20% decline in purchasing power, salaries must rise by 20% if real income is to be maintained.

Income measured in terms of the goods and services it can buy.

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 eg: 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%.

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