What is real income?
Real income is referred the actual income of the individual, business, or country after adjusting the income for inflation. It takes into account changes in the purchasing power of money over time. By accounting for inflation, real income provides a more accurate measure of an individual's or a country's economic well-being and standard of living. Monitoring and comparing real income and nominal income enable individuals and entities to understand their purchasing power and economic progress better.
Real Income Explained
Real income is an economic indicator that considers the impact of inflation on an individual's purchasing power. It reflects the actual income value after adjusting for changes in prices and living costs. By subtracting the inflation rate from nominal income, real income provides a more accurate understanding of an individual's spending power in the open market. However, it's important to note that real income is an estimate and may not fully capture an individual's specific spending habits or account for savings and investment choices.
Real Income Formula
There are indeed multiple formulas for calculating real income or real wage, depending on the available variables and the specific context. The three generally used formulas are:
-
Real Wage = Wages – (Wages x Inflation rate)
This formula calculates real wages by subtracting the product of wages and the inflation rate from the nominal wages.
-
Real Wage = Wages/(1 + Inflation Rate)
In this formula, the real wage is obtained by dividing the nominal wages by the sum of 1 and the inflation rate.
-
Real Wage = (1 – Inflation Rate) x Wages
This formula calculates real wages by multiplying the difference between 1 and the inflation rate by the nominal wages