Money National Income And Real National Income

  • Real income is simply inflation-adjusted income. To exemplify, the nominal income increased today by 10 percent from last year, the real income remains the same as that from before if the prevailing inflation rate today is 10 percent.
  • The next step is to consider the increased size of population because, although real national income has risen, it has to be shared out among increasing population. Dividing the real national income by population, we get ‘real per capita national income’ of £4,000 in 1992 and £5,000 in 1996, an increase of 25 per cent.

Handling Data: Difference between Nominal and Real National Income (GDP) Level: AS, A Level. Board: AQA, Edexcel, OCR, IB. It is important to distinguish between the nominal and real value of a country's national output and income. Test Your Knowledge - MCQ Money GDP and Real GDP. MCQ revision money GDP and real GDP - revision video. The rise in prices is eliminated by dividing nominal national income by the GDP deflator which is known as deflating the nominal national income to get the real national income. We can see from the deflated figures that real national income (or GDP) has increased by 66 2/3 per cent during the period and not by 100 per cent as the nominal income shows. Calculating national income. Any transaction which adds value involves three elements – expenditure by purchasers, income received by sellers, and the value of the goods traded. For example, if a student purchases a textbook for £30, spending = £30, income to the bookseller =.

Distinction between Real Flows and Money Flows are as follows:

Unlike a traditional economy where production is mainly for self-consumption, production in modern economy is for exchange or sale. Thus, modern economies have become exchange economies where all exchange activities take place through money. In other words, it is money which acts as a medium of exchange in modern economies. Thus, money flows in the form of income and expenditure among different sections of the society.

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Money National Income And Real National Income Definition

In this context, it will be relevant to know the views of Paul Studenski who states, “National Income is both a flow of goods and services and a flow of money incomes. It is, therefore, called national product as often as national income.” All the flows in an economy can be classified into Real Flows or money Flows. Remember, households are owners of factors of production as well as consumers whereas firms (or producing enterprises) are producers of goods and services.

Real flows:

These refer to the flows of goods and services. These are real because they consist of actual goods and services. When factor services (services of land, labour, capital, enterprise) flow from household to firms which require them for producing goods and services, these are called real flows. Similarly, when goods and services produced by firms flow from producing enterprises to households who buy them for satisfying their wants, these are also real flows. Such flows are continuous and there is no beginning point or ending point in these flows.

Money flows:

These refer to the flows of money in the form of factor payments and consumption expenditure. The money flows occur since it is through money that various transactions are conducted. It is money that facilitates such transactions bringing flows of money from one sector to another.

Difference Between Money National Income And Real National Income

When factor incomes (rent, wages, interest and profit) flow from firms to households as rewards for their factor services, these are called money flows. Similarly, when households spend their incomes on purchase of goods and services and as result money flows back to firms, these also indicate money flows.

The difference between the real flows and money flows can be explained further with an illustration. Out of three sectors of an economy—household, firm and government—let us for sake of simplicity consider the first two sectors, viz., household and firm. We assume that there is no government, no saving and no investment.

The firm sector hires productive or factor services (land, labour, capital and enterprise) from the households to produce goods and services. This is real flow. The households, in turn, receive factor income (rent, wages, interest, profit) in the form of money from the firm sector. This is money flow.

With the money income thus earned, the households purchase from firms goods and services like food, cloth, house, shoes, educational, medical and banking facilities, etc. for satisfying their wants. This is real flow from firm sector to household sector. In return, the households make payment to the firm sector in the form of money. This is money flow from households to firm sector.

Based on this simplified model, all these flows involved in it are depicted in the following figure. The inner two arrows indicate real flows which show flow of factor services from household sector to firm sector and corresponding flow of goods and services from firm sector to household sector.

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The outer two arrows reflect money flows which show flow of factor payments from firm sector to household sector and the corresponding flow of consumption expenditure from household sector to firm sector.

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The upcoming article will update you about the difference between nominal national income and real national income per capita.

The first step in our analysis is to calculate national income at constant (1992) prices or to deflate by GDP deflator to eliminate the effect of prices. As 1992 is the base year, the nominal and real national incomes are the same in that year. In 1996, though, the price index is 120 — which means part of the increase in national income is a result of the rise in prices and another part is a result of the rise in physical output.

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The rise in prices is eliminated by dividing nominal national income by the GDP deflator which is known as deflating the nominal national income to get the real national income. We can see from the deflated figures that real national income (or GDP) has increased by 66 2/3 per cent during the period and not by 100 per cent as the nominal income shows.

What Is Meant By Real National Income

Income

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The next step is to consider the increased size of population because, although real national income has risen, it has to be shared out among increasing population. Dividing the real national income by population, we get ‘real per capita national income’ of £4,000 in 1992 and £5,000 in 1996, an increase of 25 per cent.

In this example, we see, although nominal national income rose by 100 per cent, real national income per capita rose by only 25 per cent. We can conclude that an increase in nominal national income will be equivalent to an increase in real national income per capita if both prices and population do not change.

Money National Income And Real National Income Measures

Since prices and populations do change over time, it is important to compare real national income per capita rather than nominal national income, before concluding about whether or not economy is growing and economic welfare is changing with it.