Nominal income
Nominal income refers to the monetary value of income, wages or salary, without adjusting for inflation. It is the amount of money that a person or household earns in a given period of time, measured in current dollars. Nominal income is often used as a measure of economic growth and as a benchmark for determining the cost of living. However, it can be misleading when comparing income over time, as it does not account for changes in the purchasing power of money due to inflation.
Nominal income vs. real income
Nominal income and real income are two different ways of measuring income. Nominal income refers to the monetary value of income, wages or salary, without adjusting for inflation. It is the amount of money that a person or household earns in a given period of time, measured in current dollars. Real income, on the other hand, takes into account the purchasing power of money by adjusting for inflation. It is the amount of goods and services that a person or household can buy with their income, measured in constant dollars.
For example, if a person earns $50,000 per year and the inflation rate is 2%, their nominal income is $50,000, but their real income, after adjusting for inflation, would be $48,780 (50,000-2,220).
In summary, nominal income is the income measured in current dollars, real income is the income measured in constant dollars (adjusted for inflation) and reflects the purchasing power of the income. Nominal income is often used as a measure of economic growth, but it can be misleading when comparing income over time as it does not account for changes in the purchasing power of money due to inflation. Real income is a better measure of a person's or household's standard of living over time.
Nominal income and inflation
Nominal income and inflation are related in the sense that nominal income represents the monetary value of income, wages or salary, without adjusting for changes in the cost of goods and services, which is represented by the inflation rate. In other words, nominal income is the income measured in current dollars, while inflation is the rate at which the cost of goods and services increases over time.
When the inflation rate is high, the purchasing power of money decreases, which means that a given amount of nominal income can buy fewer goods and services. Therefore, an increase in the inflation rate will lower the real income or purchasing power of a person or household.
On the other hand, when the inflation rate is low or negative (deflation), the purchasing power of money increases, which means that a given amount of nominal income can buy more goods and services. Therefore, a decrease in the inflation rate will increase the real income or purchasing power of a person or household.
In summary, nominal income is affected by inflation as it does not take into account the changes in the purchasing power of money due to inflation. Therefore, nominal income alone does not provide a complete picture of a person's or household's standard of living and economic well-being over time. Real income, which is adjusted for inflation, is a better measure of a person's or household's standard of living over time.
References
- Hall, R. E., & Mankiw, N. G. (1994). income targeting. In Monetary policy (pp. 71-94). The University of Chicago Press.
- Bean, C. R. (1983). Targeting nominal income: An appraisal. The Economic Journal, 93(372), 806-819.
- McCallum, B. T., & Nelson, E. (1999). Nominal income targeting in an open-economy optimizing model. Journal of Monetary economics, 43(3), 553-578.
