Real Income

Real income means income adjusted for inflation. In simple terms, real income shows how much your income can actually buy after considering price changes. Real income is important because higher wages do not always mean people are better off if prices rise faster. If income rises but inflation rises even more, real income may fall. For example, if your pay rises 3% but prices rise 5%, your real income has decreased because your money buys less than before. Real income is not the same as nominal income. Nominal income is the number of dollars earned, while real income considers the effect of inflation.