What is the meaning of real income?

What is the meaning of real income?

If a person was earning $1,000 in 2007 and in 2015 his salary increased to $1200 whereas there was an increase of 25% in the rate of inflation. If you look at the salary you would know that there was an increase of $200 whereas in real terms there was a decrease in the person’s salary. If he were to earn the same salary he should have been $250.

 

To clarify things you could say that first it took him $1000 to buy grocery so now in order to buy the same grocery he would need 1250 as there was an increase of 25% in the prices of things. But this time the person’s salary is only 1200.

Real income is the ability to buy things and it can be shown from the above example that there was a decrease in the buying ability of the person.