What is Nominal Income?

Mary McMahon
Mary McMahon

Nominal income is income stated without any adjustments for inflation, deflation, and other economic factors. It is stated in the monetary units of a given year. The opposite is real income, income adjusted to account for inflation. When statements about income and prices are made, it is important to determine whether they are being given in nominal or real values. Commonly, statements such as “adjusted for inflation” are used to provide people with context for the information they are reviewing.

A company whose sales remain the same over a certain number of years is actually earning less each year that inflation increases.
A company whose sales remain the same over a certain number of years is actually earning less each year that inflation increases.

Over time, the purchasing power of a currency fluctuates. The amount of money that would purchase a given good or service in one year might not be enough to purchase that same good or service in a future year. This is a consequence of inflation, changes in the value of currency that drag down purchasing power and make money worth less over time. When income is stated in nominal values, it provides information about how much was made in a given year, but doesn't provide any information about how much that income translates into in terms of purchasing power in a current year or any other year.

One problem with providing statements about nominal income is that it can paint a misleading financial picture. For example, a company's nominal income could steadily climb each year, making it appear to earn more. However, if the nominal income was adjusted for inflation and turned into real income, people might find that the company is not growing, or may even be making less, depending on the pace of inflation. The same problem occurs with personal salaries, which can appear to increase each year, making people feel like they are earning more, but if they do not keep pace with inflation, people will actually be earning less in terms of real values.

In financial statements filed with financial regulators and provided to members of the public like investors, companies are required to state whether they are giving information in nominal or real values. In some regions, companies are required to use one value or another in their public disclosures. This is designed to ensure that people have accurate information that they can use to make informed decisions. Companies can use inflation calculators and other tools to adjust their nominal income into real values.

There are a number of online tools people can use to convert between nominal and real income. These can be valuable for people who want to do things like comparing earnings and salaries and evaluating job offers. For example, if a person is returning to the workforce after several years, it is not advisable to compare job offers to prior salaries. Instead, the person can adjust the nominal value of the prior salary into real income to determine whether a job offer is fair.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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