How is real income defined?

Real income is defined as your income based on its purchasing power. This concept highlights how much goods and services that income can actually buy, taking into account the effects of inflation. While nominal income refers to the total monetary income received without adjustments, real income provides a more accurate reflection of an individual's economic well-being because it considers the changes in price levels over time.

When evaluating economic situations, understanding real income is crucial because it directly impacts consumers' ability to purchase necessities and luxuries. Therefore, measurements of real income are important for making informed decisions regarding savings, spending, and overall economic health.