Real income is the income of

individuals An individual is that which exists as a distinct entity. Individuality (or self-hood) is the state or quality of being an individual; particularly (in the case of humans) of being a person unique from other people and possessing one's own need ...

nations A nation is a community of people formed on the basis of a combination of shared features such as language, history, ethnicity, culture and/or society. A nation is thus the collective identity of a group of people understood as defined by t ...

after adjusting for

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

. It is

calculated ''Calculated'' is the only studio album by the American punk rock band Heavens to Betsy, released on March 21, 1994, by Kill Rock Stars. The album received positive reviews from critics. Recording and release ''Calculated'' was recorded in Se ...

by dividing

nominal Nominal may refer to: Linguistics and grammar * Nominal (linguistics), one of the parts of speech * Nominal, the adjectival form of "noun", as in "nominal agreement" (= "noun agreement") * Nominal sentence, a sentence without a finite verb * Nou ...

income by the

price level The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set. ...

Real Real may refer to: Currencies * Brazilian real (R$) * Central American Republic real * Mexican real * Portuguese real * Spanish real * Spanish colonial real Music Albums * ''Real'' (L'Arc-en-Ciel album) (2000) * ''Real'' (Bright album) (2010) ...

variables such as real income and

real GDP Real gross domestic product (real GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e. inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantit ...

are variables that are measured in

physical units A unit of measurement is a definite magnitude of a quantity, defined and adopted by convention or by law, that is used as a standard for measurement of the same kind of quantity. Any other quantity of that kind can be expressed as a multi ...

, while nominal variables such as nominal income and

nominal GDP Gross domestic product (GDP) is a money, monetary Measurement in economics, measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjec ...

are measured in

monetary unit A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general def ...

s. Therefore, real income is a more useful

indicator Indicator may refer to: Biology * Environmental indicator of environmental health (pressures, conditions and responses) * Ecological indicator of ecosystem health (ecological processes) * Health indicator, which is used to describe the health ...

well-being Well-being, or wellbeing, also known as wellness, prudential value or quality of life, refers to what is intrinsically valuable relative ''to'' someone. So the well-being of a person is what is ultimately good ''for'' this person, what is in th ...

since it measures the

amount Quantity or amount is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by assigning a numerical value multiple of a unit ...

goods and services Goods are items that are usually (but not always) tangible, such as pens, physical books, salt, apples, and hats. Services are activities provided by other people, who include architects, suppliers, contractors, technologists, teachers, doc ...

that can be purchased with the income. According to the classical dichotomy theory, real variables and nominal variables are separate in the

long run In economics, the long-run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long-run contrasts with the short-run, in which there are some constraints an ...

, so they are not influenced by each other. In other words, if the nominal starting income was 100 and there was 10% inflation (general rise in prices, for example, what cost 10 now costs 11), then with nominal income of still 100, one can buy roughly 9% less; so if nominal income was not adjusted for inflation (did not rise by 10%), real income has dropped by approximately 9%. But if the classical dichotomy holds, nominal income will eventually go up by 10%, leaving real income unchanged from its original value.

References

Household income {{income-stub