We’re not saying your income isn’t real...we’re just saying it’s nominal.
Your paycheck every month is in nominal dollars, i.e. just the dollar amount. If that’s the case, what’s your real income? The truthful income?
Your income is only as good as prices. If you make $8 per hour and the average burger costs $8, you can have a burger per hour you work. However, if burger prices double to $16 per burger, now you can only get half a burger per hour you work. Now your boss gives you a raise to $16. You feel a sense of joy and pride. Think of all the things you could buy. Well, tough luck, because you didn’t get a real raise, just a nominal raise. Now you’re back where you started: you can by one burger for every hour you worked.
When prices and income go up, it’s because of inflation. To get your real income, we have to calculate out the inflation part. That leaves us with a sense of what the money can actually buy...what we call “purchasing power.”
In the example above, your nominal income rose from $8 per hour to $16 per hour. Your nominal income doubled. But, if prices doubled during that time period too, then your real income didn’t rise at all. Your real income stayed the same.
Next time you get a raise, take a look at your country’s inflation rates to see if your real income (your purchasing power) actually went up too (or not).
Another thing to keep in mind: prices don’t all rise at the same rates. For instance, in the U.S., the real cost of college has gotten increasingly expensive compared to other baskets of goods, like rent, food, and transportation costs. Which means that, when your mom tells you she was working a part-time job paying for college, you can tell her college is more expensive now than it was then...and not just nominally, i.e. not just because of inflation. It’s actually more expensive in real terms.
Check out the Consumer Price Index published by the Bureau of Labor Statistics to see this in action. It tracks the real costs of baskets of goods over time. Oh, and look up your raises and inflation, to make sure you’re real income isn’t going down too much.
Related or Semi-related Video
![Finance: What are Gross Domestic Product (GDP) and Gross National Product (GNP)?](https://media1.shmoop.com/video/thumbnails/COURSE.FINANCE.811_770x433.jpg)
Finance: What are Gross Domestic Product...8 Views
Finance Allah Shmoop What are gross domestic product GDP and
gross national product GNP So how do you know how
great your country is Well you can measure how many
missiles you have or you can count the number of
Olympic gold medals You've one or you can count the
number of Starbucks locations you have all over your country
for you can measure the strength of your economy Well
how do you do that Economists used to main measures
One is called gross domestic product called gross national product
Gross domestic product might sound like what happens when you
flush a baby alligator down the toilet And three years
later it crawls back out looking for its mommy But
in actuality it represents the total value of all the
stuff you make in your country along with all the
services you provide You know like legal services and dental
cleaning services and stuff like that And you know that's
provided by your citizens There You live on the sovereign
island nation of squish squad Scary Located just offshore of
Norway you are one of twelve inhabitants and all of
you fish for herring all day Each of you catch
an average of ten pounds of herring every day Hearing
sells for about ten bucks a pound and everyone works
two hundred days a year so multiply that all up
and you get twelve People work in two hundred days
a year each each catching ten pounds each day with
each pound selling for ten bucks And well you could
say the GDP of squish squad Scary is two hundred
forty thousand dollars That's the value of all the stuff
you're country made in a year Meanwhile elsewhere in the
world the numbers get a bit higher For instance the
GDP of the U S was about nineteen trillion dollars
in two thousand seventeen so Well yeah that's a little
bit more But of course the U S has three
hundred twenty five million ish people in it instead of
the twelve squid squid aeons And its GDP includes things
like airplane manufacturing and high value financial transactions And you
know shmoop subscription sales instead of just herring fishing So
it makes sense that the U S economy would be
much much bigger toe Look at how an economy is
doing People usually watch how it changes over time say
one of your fellow squish Quaid Ian's starts fishing with
dynamite Well it's a new technique Output goes from ten
point today to twelve next year With the new output
your GDP goes two hundred eighty eight thousand from the
two forty and change before That's twenty percent GDP growth
in a year We'll guess what big complex economies like
the US pretty much never see growth rates like that
Economists usually consider it a healthy growth rate to be
more like two or three percent in a given year
Smaller countries and developing countries can have bigger growth rates
Right Like take China It's a big country biggest population
in the world with no more than a billion and
a half people But it's still racks up relatively high
GDP growth rates because of the rapid expansion of its
manufacturing base Right they optimize their farmers and take them
from growing turn ups and instead have them assemble semiconductors
and stuff like that way higher margin to sell a
semiconductor than a turnip As recently as two thousand ten
China put up annual GDP growth rates still in the
double digits like ten percent and hit double digits and
change for five consecutive years in the early two thousand
Well GDP doesn't always go up in nations around the
world The year after discovering dynamite fishing swish squad Ian's
suffered a Siri's of significant storms The number of work
days went down from two hundred to one ninety Everything
else stayed the same self In that year GDP fell
to two hundred seventy three thousand and change from the
two eighty eight It was the year before decline of
five percent Well he kind of is called that decline
a contraction if a contraction happens for two or more
quarters in a row so like two three months periods
in a row the country is considered to be in
a recession If the contractions air deep enough and last
long enough well then that's called the depression like it
goes on for a year Two years or three years
Both GDP and GNP measure the economic output of a
country but they used different definitions about what all that
entails Gross domestic product consists of all the products and
services made it given your inside the country So you
know made within the borders of the country made domestically
gross national product measures the stuff made by people or
companies from a country regardless of where it was actually
made like you're an American citizen No building pots or
pottery in Mexico We found that in the GNP number
so GDP tracks where it was made GNP tracks Who
made it So if an American it's a toilet cozy
while sitting in his living room in Des Moines that
gets included in both GDP and GNP However if an
American goes on vacation Teo Cameroon and it's a toilet
cozy in his hotel room there well that's included in
GNP but not in GDP was made by an American
but not in America Well meanwhile if the American comes
back home to Des Moines and a Scottish friend of
his comes over and it's a toilet cozy for him
that would count in GDP but not in GNP right
The toilet cozy was made in the US but not
by an American In the old days like before the
nineteen nineties GNP was typically used to track national economic
growth However with the dramatic rise of globalization around that
time GDP became much easier to track Eventually it became
the go to measure of growth to review Both GMP
and GDP track national economic output They both look at
the amount of goods and services produced by the country
though they have different working definitions about what that means
The size of GDP and GNP are impacted by the
size of a country In the level of economic and
technical sophistication Big complex economies like the US usually aspire
to modest growth like two or three percent smaller Countries
in developing economies can post much higher growth rates with
percentages in the double digits Not being all that uncommon
GDP measures the value of stuff produced within a country
regardless of who makes it GNP measures the value of
stuff made by citizens of a country regardless of where
it's made So if a squish squatty and citizen were
toe float a raft into Norwegian waters and catch some
herring there While that would count on GNP on their
books but not G Meanwhile if he invited a Norwegian
friend over for a day of fishing for anything that
Norwegian caught would count on the squish Wadi and GDP
but not on the squish Claudia and G N P
if the scratch Wadi Ins were to launch a surprise
attack on Norway However wealth and all bets would be 00:06:23.518 --> [endTime] off You just have to see who is
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