5. On Income

Inflation affects the income of individual and firms alike. An increase in inflation, increases the ‘nominal’ value of income, while the ‘real’ value of income remains the same. Increased price levels erode the puchasing power of the money in the short-run, but in the long-run the income levels also increase (making the nominal value of income going upward). It means, in a given period of time income may go up due to two reasons, viz., inflationary siituation and increased earning. The concept ‘GDP Deflator’ (GDP at current prices divided by GDP at constant prices) gives the idea of ‘inflation effect’ on income over a given period.