Question

if the real income is 200 and the nominal income is 800 the what will be the value of price index​

Answer 1

Answer:

Real income is the earnings of individuals or the nation after adjusting to the extent of inflation. It is computed by dividing the nominal income by the price level. Both the real variables, such as real income and real GDP, must be measured in physical units. In contrast, nominal variables, such as the nominal income and nominal GDP, will be measured in monetary terms.

Consequently, real income is better and a useful indicator of the well-being since it estimates the count of goods and services purchased with the earnings.

As per the classical dichotomy theory, both real variables and nominal variables are distinct in the long run, so they are not affected by each other.

Suppose that the nominal income at the beginning is Rs 100 and the inflation is 10% every year ( i.e. general rise in prices). If the nominal income continues to be Rs 100 next year, one can buy less to the extent of roughly 9%. Therefore, if nominal income has not been adjusted for inflation every year (i.e. increased by 10%), the real income has dropped by about 9%.