Real income in Year X is equal to:
A) $\frac { \text { Year X nominal income } } { \text { Year X real GDP } } \times 100$
B) $\frac { \text { Year X nominal income } } { \text { Year X real output } } \times 100$
D) $\text { Year } X \text { nominal income } \times \text { CPI }$

Question

Real income in Year X is equal to:
A) $\frac { \text { Year X nominal income } } { \text { Year X real GDP } } \times 100$ 
B) $\frac { \text { Year X nominal income } } { \text { Year X real output } } \times 100$ 
D) $\text { Year } X \text { nominal income } \times \text { CPI }$

Quizplus · Accepted Answer

Real income is defined as the purchasing power of nominal income, adjusted for inflation. Therefore, it is simply the nominal income expressed in constant dollars, which is given by the consumer price index (CPI) for the base year. Thus, the correct formula for real income is C, where C is just the nominal income divided by the base year price level, or equivalently, multiplied by the price index divided by 100. Choices A and B are incorrect because real GDP and output are not the same thing, and they cannot be used interchangeably to compute real income. Choice D is also incorrect because real income is not equal to nominal income times the CPI, but rather nominal income expressed in constant dollars, as explained above.

Real Income in Year X Is Equal To: A) Year X nominal income Year X real GDP ×100\frac { \text { Year X nominal income } } { \text { Year X real GDP } } \times 100 Year X real GDP Year X nominal income ​×100

Real Income in Year X Is Equal To:
A) $\frac { \text { Year X nominal income } } { \text { Year X real GDP } } \times 100$