Question

If Juan is an employee in a municipality of Aklan receiving salary less than Paul who is employed in the city yet, comparatively, Juan have better living standard than Paul who is receiving more. What advantage does Juan have over Paul?

1. Real income
2. nominal income
3. Relative income
4. Spending discipline

In what aspect is Paul more aptly advantaged than Juan?

1. Real income
2. nominal income
3. Relative income
4. Spending discipline

Answer 1

1. a. Real income

Real income is income which is adjusted for inflation, thus, it is the true representation of purchasing power. For instance, since Juan lives in a municipality even though his income is lesser than Paul it is not wrong to assume that he is still better off because the cost of living in a municipality is less than the cost of living in a city.

2. b. nominal income

Nominal income means income that an individual earns in reality. It is not adjusted for inflation (price level) or purchasing power. Paul is at advantage than Juan in nominal terms as Paul's salary is higher than that of Juan. This will not take into the price differentials into account.