Difference Between Money Income and Real Income

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Money Income, Real Income & Nominal Income

Difference Between Money Income and Real Income
Money Income, Real Income & Nominal Income

Money Income in economics is the price of inputs such as fixed supply such as land, the principal or even a unique talent such as a footballer or musicians while Real Income is the amount of goods and services that a person can acquire through their monetary income.

What is Money Income?

Money income is the amount of income that is earned through work.

Money Income in economics is the price of inputs such as fixed supply such as land, the principal or even a unique talent such as Messi footballer or singer Beyonce. It is a stream of income that is received from the use or rental of said inputs.

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What is Real Income?

Real income is the amount of goods and services that a person can acquire through their monetary income. Real income shows, therefore, what goods can be purchased with money income.

Real income, therefore, depends on how money income and product prices or inflation behave . In this sense, if money income rises, but prices remain constant or fall, we would be talking about real income being higher. On the contrary, if prices rise, but money income remains constant, we will be able to buy fewer goods and, therefore, our real income is reduced.

Money Income vs Real Income – Differences

  • Money income of a country is the amount of income (in monetary terms) earned by factors of production excluding transfer payment in a given year or how of goods and services produced in an economy.
  • However, money, as a medium of exchange, and a measuring device, has one major disadvantage. This is the change in its size from time to time due to inflation in the system. Hence, there is a difference between money income and real income.
  • Real Income is the basket of goods and services which the money income can obtain.
  • In terms of the National Income, real national income is obtained by dividing the money national income by the price index
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If, for example, the Gross National Product of a country was $70 million in 1991 and $350 million in 2011, it means money income has grown five fold during this period. But if during this same period, prices have doubled, then Real Income in 2011 would be $140 million measured in 1991 dollar value.

This means that twice as many goods and services were produced in 2011 as in 1991.

Real Income vs Nominal Income – Differences

Real income, as we said, is the exact opposite of nominal income. These are based on the same, on income. But in its measurement, one includes aspects that, in a certain way, condition the income to certain factors that we will now see.

On the one hand, real income is, as we said, the amount of goods and services that a person can acquire with their monetary income. That is, the purchasing power of the person, by conditioning said income to inflation and other factors that affect said power.

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While, on the other hand, nominal income is the income flow, but it does not undergo any adjustment conditioned by factors such as inflation, deflation, as well as a series of other factors. This, roughly, measures the amount of income in monetary units.

Another factor that must be taken into account, although we have not mentioned it, is the tax burden. That is, taxes . Although it is true, that its adjustment depends on the concepts of gross and net.