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In: Economics

Should people typically pay more attention to their real income or their nominal income? If you...

Should people typically pay more attention to their real income or their nominal income? If you choose the latter, why would that make sense in today world?

Solutions

Expert Solution

Nominal income is your income in a specific currency unit at a specific place and time. Like, I earned $1,000 this month. “Real” income is an attempt to translate this into what you can buy with it. For example, the primary difference is usually taking into account inflation, as you will read in other answers — that brings in WHEN the money was received. In some situations you may need to account for pricing or exchange rate disparities between locations. For example, a worker in Alaska might receive $1,200 and still only have $1,000 in normal spending power because the prices are higher there than in most of the country.

So in todays time , inflation is one of the important macroeconomic factor which cannot be neglected . So people today not only pay attention to income they have but more towards what they can buy from that income . There buying capacity has increased or not . Buying capacity is more important than what you have in your pocket . Hence Real GDP is more preferable income that people will choose .


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