Nominal Income

• Nominal income is monetary income belonging to individuals or nations that has not been adjusted to take inflation or decreasing purchasing power into account. As opposed to real income, which tells us how much we actually have to spend, nominal income tells us the amount of income we have received as part of our salary or business profit in a specific period of time.
  
  

Use of Nominal Income

• Nominal accounts are detailed in income statements or reviews of revenue and expenses over a specific amount of time. Because the balance of a nominal account is cumulative over a period of time, such as a year, at the end of that year an accountant uses that balance to establish both the net profit and loss for that time period. On the other hand, a real account balance is the net amount after taking away the account's decreases from its increases. Real accounts are continuous, covering assets, liabilities and owner's equities. Nominal accounts close at the end of the year.
  
  

Income

• When referring to a household, income is the amount of all wages, salary, profit, interest payment, rent or other types of incoming payment in any time frame. When referring to companies, it is the net profit, or what is left of revenue after expenses are subtracted. When referring to public economics, it is the buildup of not only monetary (used to represent total income) but non-monetary expenditure ability as well.
  
  

Real Income

• Real income is monetary income after the adjustment to take inflation or declining purchasing power is taken into account. It can calculate what quantity of goods and services can be purchased with nominal income, meaning it can tell us how much we actually have to spend. Real income is influenced by nominal income. Real income goes up if nominal income goes up faster than general prices. Real income goes down if nominal income goes up slower than inflation. Real income doesn't go up if nominal income and general prices remain at the same level.
  
  

Defining Inflation and Purchasing Power

• Nominal income is adjusted without taking into account inflation or purchasing power, while real income takes both of them into account. Inflation happens when there is an increase in the level of general prices for goods and services. For instance, if a grocery item is $1 and the inflation rate is 2 percent, in a year that same grocery item will be $1.02. Purchasing power is the ability of the consumer to buy goods and services with a unit of currency. A dollar in the 1950s would buy many more items in a store than it will currently, meaning that a person had greater purchasing power in the 1950s than he does now. Purchasing power falls if monetary income remains the same but prices increase. Purchasing power increase only when real income increases more than nominal income.