## What is 'Real Income'

Real income refers to the income of an individual or group after taking into consideration the effects of inflation on purchasing power. For example, if you receive a 2% salary increase over the previous year and inflation for the year is 1%, then your real income only increases by 1%. Conversely, if you receive a 2% raise in salary and inflation is at 3%, then your real income shrinks by 1%.

Next Up

## BREAKING DOWN 'Real Income'

Real income, also called real wages, refers to the amount of goods and services you can buy today compared to the price of the same goods and services you could have purchased in another time period. For example, if it costs you \$2,000 more to purchase the same amount of goods and services (such as food, gas, rent and utilities) this year compared to last year, and your annual income is the same, then your real income has actually decreased by \$2,000.

## How Real Income Relates to the Consumer Price Index

As real income measures the purchasing power of an individual's wages, analysts often compare it to the Consumer Price Index (CPI). The CPI measures the average cost of a basket of goods including food and beverages, education, recreation, clothing, transportation, and medical care. In the United States, the Bureau of Labor Statics publishes CPI numbers monthly and annually.

## How to Calculate Real Income and Purchasing Power

Real income generally compares the purchasing power of income from one year to the cost of goods in another year, and real income can also help you compare wages from two different years, taking inflation or changes to the CPI into account. To compare wages from two different time periods, take the wage from one period and multiply it by the CPI of the other period. Then, divide the product by the CPI from the original time period.

For example, imagine you earned \$12 per hour in 2003 and you earned \$25 per hour in 2015. If you want to ascertain how your real income has changed over that 13-year period, you need to calculate your 2003 wage in terms of 2015 prices. The CPI for all items in 2003 was 184, while the CPI for 2015 was 236. To continue, multiply \$12 (your 2003 wage) by the CPI in 2015. The result is \$2,832. Then, divide that number by the CPI from 2003 to get \$15.39. This means your 2003 wages are worth \$15.39 in 2016, taking inflation into account.

To calculate the change in your purchasing power, subtract the purchasing power of your old wage from the wage to which you are comparing it. In this case, \$25 - \$15.39 = \$9.61. In terms of real income, you earn \$9.61 more in 2015 than you did in 2003. To express this change as a percentage, divide the difference by the purchasing power of your old wage. In this case, \$9.61/\$15.39 indicates your real income increased by 0.624 or 62.4% from 2003 to 2015.

RELATED TERMS
1. ### Wage Push Inflation

Wage push inflation is a general increase in the cost of goods ...
2. ### Income

Income is money that an individual or business receives on a ...
3. ### Active Income

Active income refers to income received from performing a service.
4. ### Personal Income

Personal income is the total compensation from several sources ...
5. ### Nominal Gross Domestic Product

Nominal gross domestic product measures the value of all finished ...
6. ### Minimum Wage

The minimum wage is a legally mandated price floor on hourly ...
Related Articles
1. Insights

### Will You See Higher Wages In 2015?

It's been a few years into the economic recovery from the Great Recession, and the employment picture has been rocky.
2. Insights

### How Inflation Affects Your Net Worth

When calculating your net worth, don't forget to take inflation into account.
3. Insights

### Good News: Long-Awaited Wage Growth is Finally Happening

American wages reached record levels last year--and not just for the wealthy.
4. Personal Finance

### The Minimum Wage: Does It Matter?

The numbers show that a fight for a living wage is more important than a fight for a raise in minimum wage.
5. Investing

### Timeless Ways To Protect Yourself From Inflation

Inflation is a natural part of modern life, but there are some time-tested ways to inflation-proof your assets.
6. Investing

### How to make money in real estate

If you're interested in the real estate investment, check out these factors that will affect your investment return.
7. Insights

### Opinion: Trump's Lament That He 'Inherited a Mess' of an Economy? False! Sad!

So much for The Donald’s ‘Crippled America,’ as new numbers show incomes soaring under Obama.
8. Investing

### Maximize Your Real Rate of Return for Retirement

Learn to understand how to plot your portfolio's real rate of return for retirement planning to safeguard your retirement funds against inflation.
RELATED FAQS
1. ### What is the difference between gross income and earned income?

The difference between earned income and gross income is an important one come tax time. Find out how the IRS uses both to ... Read Answer >>
2. ### Does raising the minimum wage increase inflation?

Explore whether raising the minimum wage increases inflation. This is a polarizing topic that is inherently linked to unemployment. Read Answer >>