during a given year nominal national income increased by 14% while the real national income increased by only 6%.Popoulatiion incresed by 2%. What has caused the differnce betweeen national income and real income ? What is real per capita income?
First of all, you need to understand the concept of the real and nominal income. Nominal income is income in the absolute terms say Rs 1,000 or Rs 5,000, etc. On the other hand, the real income is the income adjusted for the inflation level. This is to put in different words that real income is a ratio of nominal income and price.
Let's suppose, if nominal income is Rs 1,000 and inflation rate is 10%, then the real income is expressed as 1,000/10 i.e. Rs 100. From this, you can infer that the difference between the nominal and the real income is due to price level.
Also, an important point to be noted here is that population change has nothing to do with the concept of the real and the nominal income . Thus, the whole difference between the real and the nominal income can be attributed to the inflation rate.
Lastly, let's talk about real per capita income. The concept of real per capita income is totally different from real income. The word per capita implies the influence of the population variable. Real per capita income is expressed as Real Income upon Total Population.
Let me put the algebraic form of the two variables quoted so far in the answer.
Nominal National Income = Price × Quantity of output produced
In response to the question, the rise in the nominal national income is either due to a rise in the price or due to rise in the quantity of output produced or both. On the other hand, a rise in the real national income is only due to a corresponding rise in the quantity of output produced. Now, as given in the question that there is 6% rise in the real national income. Hence, the 14% rise in the nominal national income is due to 6% rise in the quantity of output produced and remaining due to 8% rise in the price. Lastly, the rise in real per capita income is 12%. This is ascertained using the formula given below.
Rise in real per capita income = Rise in real national income − Rise in population so, Rise in real per capita income =6 − 2 = 4%
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