What Are Nominal Income and Real Income?

There is a difference between nominal income and real income. Nominal income is the amount of money that we receive as wages, rent, or interest, while real income is the purchasing power of nominal income.

The formula is:

Real income =    Nominal income  :  Price index (in hundredths)

For example: (source : Statcan)

The Nominal Income of Canada based on median total income in 2007 is $ 66,550, and the consumer price index in 2007 is 111.5. So the Real Income becomes: $ 66,550 / 1.115 = $ 57,870

In 2008 the nominal income is $ 68,860, and the consumer price index is 114.1. The Real Income now is: $ 68,850 / 1.141 = $ 60,350.

In 2009 the nominal income is $ 68,410, and the consumer price index is 114.4. The Real Income is: $69,410 / 1.144 = $ 59,799.

The rule that tells us by how much approximately the real income will change:

Percentage change in real income = percentage change in nominal income – percentage change in price level.

Between 2007 and 2008, the nominal income changes 3.47%, the price changes 2.6%, so the real income increases 0.87%.

Between 2008 and 2009, the nominal income changes – 0.65%, the price changes 0.3%, so the real income decreases 0.95%.

If the percentage change in nominal income is similar to the price level, so the real income will remain the same.