Question

Discuss the impact of an increase in real income in one country. The post should consider both the domestic and foreign impact as well as what the results from the graphical interpretation would mean for the people with each country. Any critique on what the model shows in the chapter are welcome.

Answer 1

Real Income –Impacts
Real income is the amount of money or income and individual or firm earns after accounting inflation. Real income actually refers to the purchasing power of people where nominal income accounts only the amount of money an individual or firm earns. A higher rate of inflation can affect the purchasing power negatively by reducing the capacity of money to purchase the amount of goods that were consuming before. An increase in real income would increase the purchasing power of the people with reduced prices of goods. This can increase the demand for goods in the economy. Thus the reduction in prices of goods with increased value of money helps to stimulate the economy by demanding and supply for the effect occurred by the real income.
Real income making a positive effect on the purchasing power of people, the economy could be encouraged by increased ability to purchase. This can leads to increased demand and supply of goods in the market. Even the effect have a positive side of demand, the foreign trade can make a negative effect by increasing imports due to increased purchasing power and imports becoming less expensive. With the increased real income negatively affects inflation, that is, the increased money value leads to exports more expensive. So, the change in real income can encourage imports more than the domestic consumption. The purchasing power could increase the standard of living of the domestic country but the effect is negative in the trade balances.