Real Income
Candlefocus EditorReal Income, also known as real wage, is the total income earned by an individual or entity adjusted for inflation. It is a measure of purchasing power and takes into consideration the rising prices of goods and services. It is an accurate reflection of how much one can buy with the money earned, as opposed to nominal income which does not consider inflation.
The Consumer Price Index (CPI) is used as a benchmark for inflation and is widely used to calculate real income. As per historical records, when inflation goes up, real income and purchasing power declines, while nominal income and purchasing power remain unaffected. This effect is usually seen on a per-dollar basis rather than overall income.
Why is Real Income Important
Real income is a very important tool to understand purchasing power, especially during times of rising inflation. Unlike nominal income, it provides an accurate picture of how much money one will be able to purchase with their income, allowing individuals to understand their respective living standards. Real income is often a better indicator of financial health than nominal income, since it accounts for rising prices.
With the rise in the cost of living, tracking real income is a must for anyone looking to make financial decisions. This includes businesses that need to make investments and decisions based on an accurate report of the cost of goods and services in relation to income. Real income is also used by governments to track changes in spending and the economic health of their citizens.
Real income is an essential tool to understand the true impact of wages, which can be misleading when inflation is not taken into account. In order to make meaningful and realistic financial plans, it is important to ensure that both nominal income and real income are taken into consideration.