This article will help you to learn about the difference between nominal national income and real national income per capita.
Difference between Nominal National Income and Real National Income Per Capita
The first step in our analysis is to calculate national income at constant (1992) prices or to deflate by GDP deflator to eliminate the effect of prices. As 1992 is the base year, the nominal and real national incomes are the same in that year. In 1996, though, the price index is 120 — which means part of the increase in national income is a result of the rise in prices and another part is a result of the rise in physical output.
The rise in prices is eliminated by dividing nominal national income by the GDP deflator which is known as deflating the nominal national income to get the real national income. We can see from the deflated figures that real national income (or GDP) has increased by 66 2/3 per cent during the period and not by 100 per cent as the nominal income shows.
The next step is to consider the increased size of population because, although real national income has risen, it has to be shared out among increasing population. Dividing the real national income by population, we get ‘real per capita national income’ of £4,000 in 1992 and £5,000 in 1996, an increase of 25 per cent.
In this example, we see, although nominal national income rose by 100 per cent, real national income per capita rose by only 25 per cent. We can conclude that an increase in nominal national income will be equivalent to an increase in real national income per capita if both prices and population do not change.
Since prices and populations do change over time, it is important to compare real national income per capita rather than nominal national income, before concluding about whether or not economy is growing and economic welfare is changing with it.