Real income is defined as:

Real income is defined as income adjusted for inflation, which means it reflects the true purchasing power of individuals. When nominal income is adjusted for the effects of inflation, it provides a more accurate representation of what individuals can actually buy with their earnings. This adjustment is crucial because inflation can erode the value of money over time, impacting how much goods and services can be purchased.

Understanding real income is essential in macroeconomics as it allows for a more meaningful comparison of income over time and across different economic conditions. For example, if someone earns a nominal income of $50,000, but inflation is at 5%, their real income may effectively be lower because they can buy less with that same amount of money than they could prior to the rise in prices. This concept is vital for assessing the economic well-being of individuals and households, as it goes beyond mere income levels to consider the actual value of that income in terms of what it can purchase.