Impact Of Electricity Consmption on Population Growth, Income and Foriegn Direct

Investment

A thesis submitted

By

M.Hamdan Hussain

Id: 4051

To

Department of Business Administration

In partial fulfillment of

The requirement for the

Degree of

MASTER OF BUSINESS ADMINISTRATION

In

Finance

This thesis has been

Accepted by the faculty

FACULTY OF BUSINESS ADMINISTRATION

________________________

Syed Ali Raza

Advisor

______________________

Syed Tehseen Jawaid

Manager

Table of Content

CHAPTER-1 INTRODUCTION.............................................................................................1

1. Introduction..............................................................................................................................1

1.1 Background:...........................................................................................................................1

1.2. Problem Statement:...............................................................................................................2

1.3. Research Objective:..............................................................................................................3

1.4. Research Question:...............................................................................................................3

1.5 Scope of the Study:................................................................................................................3

1.6 Limitations of Study:.............................................................................................................3

CHAPTER-2 LITERATURE REVIEW.................................................................................4

2. Literature Review....................................................................................................................4

2.1 Theoretical Background:.......................................................................................................4

2.2 Empirical Studies:..................................................................................................................5

CHAPTER-3 METHODOLOGY..........................................................................................16

3 Methodology...........................................................................................................................16

3.1 Research Approach:.............................................................................................................16

3.2 Research Purpose:................................................................................................................16

3.3 Research Design:.................................................................................................................16

3.4 Data Source:.........................................................................................................................16

3.5Period:...................................................................................................................................17

3.6 Statistical Technique/Tools:................................................................................................17

3.7 Model:..................................................................................................................................17

3.8Hypothesis: ..........................................................................................................................18

3.9Variable Description:............................................................................................................19

Introduction

1.1 Background Factors of Economic growth of any Country in all over the world depend upon the energy consumption. One of the leading factors of energy consumption is electricity. Electricity plays a vital role for the development of any country whether it is required for commercial and non-commercial usage. In commercial we use electric power in any type of industry, fishery and agriculture. In non-commercial we use the electric power for improving our living standard through using some domestic lighting, domestic mechanical gadget like refrigerator, air conditioners. Electricity becomes the necessity of life.

Electricity have a very important role of individual or house hold. A person or households require electricity for the daily work routine. Electricity has become the main form of energy as a leading source to improve the standard of living. Latest invention or research boosts the demand of electricity. In many projects researcher are trying to improve the quality of life which leads to manual devices to friendly user technological equipment. The demand for electricity is rapidly growing in Asian countries. There is a massive use of information and communication technologies.

In Asia there is a serious electricity demand supply mismatch because of the use of the old designed and heavy electricity consuming machines in some countries region. The continental of Asia is on the top of list for consuming energy because it have some large population countries like China, India, Pakistan etc. There are some method to produce electricity like solar panel, static electricity, electric generator, batter, thermocouple temperature device and electric turntable cartridge. Most of the countries fulfill their electricity requirement through other projects like sunlight, coal, water and oil. Every new day there is an increase of electricity consumption not only in Asia but also in all over the world.

Electricity has its impact on income, population and foreign direct investment. The energy has been identified, computes and dignified by every country of the world because they know the importance of the energy. Because of these reason there is ups and down in electricity prices in 20th century. In the last century there is an increase in electricity consumption instead of increase in energy resources. International Monetary fund (IMF) World Bank (WB) is looking to find out the model which can utilize for calculating energy consumption rate as well as looking for increase in price of the product which is requires to produce energy consumption(Oil, gas).

Energy consumption is cut down around 1.5% at the world level. This is the first time after the Second World War. But the Asia and Middle East are not able to cut down. Electricity consumption demand also cut down around 4.5% by Europe and North America both. Japan also cut down electricity consumption demand by 7%. But the two largest population countries India and China continued to consume on strong pace by 7% to meet their economic growth. In Middle East there electricity consumption is high by 4.5%.

Coal is one major factor of electricity. Coal can be used for power of generation. Coal was not such impact on the economic development of any country due to less attention by the authorities. But now Most of the countries are coming towards the use of coal for producing electricity for economic development. If there is an increase in electricity consumption so there should be an increase in resources. Coal may be the good option to produce electricity.

Tang (2008) examined that there is a positive relationship between electricity consumption, foreign direct investment and population growth. If there is an increase in electricity consumption other factor (Foreign direct investment, population growth, income growth) also increased.

1.2) Problem Statement

In previous years, many studies have been conducted to find out the relationship between

electricity consumption and economic growth and these researches are done in all over the

world1. Most of the researchers have conducted the relationship between the electricity

consumption and GDP 2.Some of the researchers also measures the impact of electricity

consumption on population growth, foreign direct investment and income 3. Past studies

indicate that there is significantly positive relationship between the electricity consumption,

foreign direct investment and income. However, there is a variety of research done on

electricity consumption, income, economic growth and foreign direct investment in all over

the world as well as in Asian countries scenario, but there is still need to work on energy

consumption. In that consideration that research has been conducted to examine the

electricity consumption impact on population growth, income and foreign direct investment.

1.3) Objectives of the Research:

To find out the impact of electricity consumption on foreign direct investment, population

growth and income.

To find out the relationship between electricity consumption, population growth, foreign

direct investment and income.

1.4) Research Question:

Is there any impact of electricity consumption on population growth, income and FDI.1 Gupta and sahu (2006)2 Chen Et all (2006)3 Tang (2008)

1.5) Scope of the research:

This research is designed to examine the impact of energy consumption on economic

growth. Consumption may also have variable parts like distribution and prices. So it will

provide,

The statistical data for the policy makers that how will they overcome the shortage

of energy resources .And how will they generate further power resources to resolve

this issue, especially from coal.

This research will provide the statistical data to the investor that if they will invest in

power generation in Pakistan then what return will they get or will suffer a loss.

Finally it will help and provide the authentic information to the economist of

Pakistan and also the investment board that how will they plan to generate and

distribute energy in all sectors.

1.6) Limitations:

The time period is limited for detailed research.

AS I am working person I am facing a lot of problems during the research time

period.

I want to do my research in electricity consumption function, population growth, FDI,

and income with the help of time series data.

2) Literature Review

2.1) Theoretical Background:

Energy crises overcoming in the World market but these issues are resolving by increasing in

the production and availability of resources through new invention. Now the world has

leaved back and ignores the previous trends of an electricity use. There is some method

which is use for generating electricity in world wide. These methods are electric turntable

cartridge, electric generator, batteries, solar panel etc. These latest techniques need wind, sunlight,

rain and heat, coal. These resources are easily available in world market in a massive form.

Nowadays mostly scientists are working on coal comparatively to other resources. Coal is just use

for power generation purpose. Now electricity is the essential need for any individual or

house hold. According to the theory there is a most trends and shape of energy in the world

which are using for commercial and individual use. Nuclear power is used for obtaining the

atomic energy and also established an atomic plant from the help of nuclear

energy .Renewable energy is obtained from wind, sun light, rain and heat to get an alternate

resources for energy consumption.

Electricity consumption has a strong relationship with population growth, electricity

consumption, foreign direct investment, income. If there is an increase in electricity

consumption then there is an increase in population growth. Past studies indicates that

population growth plays an important role by consuming electricity whether we talk about

commercial or non commercial usage. FDI is the new explanatory variable into the electricity

consumption. Conceptually If FDI induce in any country for enhancing industry sector,

agriculture sector, manufacturing sector there is a need of electricity for the growth of these

sectors. The informal link between the electricity consumption, income, population growth

and FDI are vital because it has significant impact on country’s development policy. Policies

which encourage electricity consumption will be harmful for the economy of the country.

Electricity is now the running engine for most of a country’s economic activities, especially

for those countries which are focusing on industrialization development such as India,

Malaysia, and China. Over the past decades Asia is not able to shrink the electricity

consumption. As you know that the huge increase of electricity consumption is one of the

important factors which lead the Asian developing countries into the vision of industrialized

and developed countries in the future. Moreover the increase of FDI affects the electricity

consumption in Asian countries through the high investment in manufacturing and the

advance technology industry. Now the electricity has become the leading source for today

and as well as for the future economic development not only in Asia but also in the world.

2.2) Empirical studies:

Tang (2008) examines electricity consumption, income, foreign direct investment, and

population growth in Malaysia during the period of 1970-2005. In this study co integration

test has been applied to analyze the relationship of electricity, income, foreign direct

investment and population growth. The main variable FDI, Population growth and Income.

All variable have a positive significant between electricity consumption. In Malaysia when

huge amount of FDI comes so electricity consumption increases so Malaysia economic

growth increase. It is suggested that Malaysian Government reduce their tax rate so FDI

come easily.

Gupta and Sahu (2006) investigate that electricity consumption and economic growth in India

during the period of 1960 to 2005. In this research Granger Engel causality test has been

applied to analyze the effect of electricity consumption on economic growth. The main

variable is real GDP. Real GDP have a positive impact on electricity consumption. This

research implies that increase in electricity consumption may be leading indicator of growing

economy particularly developing country such as India. Government of India should remove

the power sector inefficiencies to get the welfare goal as well as millennium development

goals.

Altinay and Karagol (2005) examine the relationship between electricity consumption and a

real GDP in Turkey for the period of 1950 to 2005. In this study Granger causality test has

been applied to investigate the relationship between the electricity consumption and real

GDP. The main variable is Real GDP. Real GDP have a positive impact on electricity

consumption. This research implies the increase in electricity consumption will lead to

economy on better position. This research also implies that supply of electricity is vitally

important to fulfill the requirement of electricity consumption. Government of Turkey should

provide the electricity requirement to grow electricity consumption, hence to maintain the

economic growth.

Shamizadeh et Al. (2012) analyze the impact on economic growth of energy prices in Iran

during the period 1979 to 2008 .In this study co integration test has been applied to analyze

the impact of prices on economy growth .They consider Gross domestic product, Kerosene,

fuel, gasoline, electricity and gas subsides as variables. All energy subsides has significant

negative impact on Gross Domestic Product. Also Durban Watson statistics is estimated and

calculated and that shows that auto correlation is not present in the model. That research

would be help for further research and interesting to apply the model including the

mechanism of channels to a larger countries sample. This will require a very critical and

calculated work of different institution and political conditions.

Kakar and Khilji (2012) examine and identify the nature of relationship between economic

growth and total energy consumption for Pakistan during 1980 to 2009. In that study two

techniques which are Co-integration and Error Correction Model has been applied to identify

the energy consumption and economic growth relationship. They consider natural logarithm,

annual growth rate of GDP and total energy consumption as variables. All the variables are

co integrated and there is a long run relationship between the variables. They suggest that

further research may done on by changing the variables which having the impact on

economic growth.

Amin and Rahman (2011) investigate the causal degree of relationship between energy and

its output in Bangladesh during 1973-2007. In that study Aurumented Dicky Fuller (ADF)

test has been used .They consider real gross domestic product, energy use, energy production,

electricity production and electricity consumption as variables. The increase in economic

activities in the country may cause the energy production, this may increase the energy use

and result high economic growth. They suggest that further research could be done to test the

validity between output energy and environment pollutants in Bangladesh. A new direction

for future research would be to examine the relationship between energy growth, pollution

causes and other related and relevant variables such as automobile use, health expenditure

and urbanization.

Young-Xiu, et al. (2007) empirically identifies that how industrial consumption and energy

consumption have an effectiveness on gross domestic product 1978 to 2006.In that study

Granger causality test, co integration and error correction model test has been applied to

check the effectiveness of energy consumption and industrial consumption on GDP. They

consider GDP and energy consumption as variables in this research. There is a motion

produced by such a force or to impulse a response to energy consumption caused and affected

by economic growth which is important in that time period.. They suggest that to to make

perfect and affective the industrial sector and structure should improve the technical level of

industrial production for strong economic growth.

Menyah and Rufael (2010) empirically estimate the long run and causality relationship

among economic growth and energy consumption in South Africa during the period 1965–

2006.They consider Granger non causality test and co integration test to find the effectiveness

of energy variables on GDP in south Africa. They consider log of real GDP,fixed capital,

energy consumption,employement and oil consumption(carbon dioxide gas) .There is a short

and long run relationship between the variables with positively statistically significant

relation among pollutant emissions and gross domestic product which is an economic

growth.. They suggest that policy makers should applying a new and modified version of the

Granger causality test and further take different variables which may have an impact on

economic growth.

Gelo (2009) empirically investigate that how energy consumption may have an impact on

economic development in Croatia during 1953 to 2005.In that study Granger causality test

unit root test and vector error correction. They consider total primary energy consumption

TPEC(coal, liquid oil, hydropower, waste ,electricity and renewable) and fluctuation of

economic activity(GDP) as a variables. There is a significant relationship in the fact that

gross domestic product is the cause of change in total primary energy consumption and on the

other hand primary energy consumption is not the cause of change in gross domestic product

or economic activity. They suggest that policy makers should make further research on the

relationship between gross domestic product and oil consumption .Variables could be other

then electricity coal and gas.

Bayruktutan, et al. (2012) investigate the effect of energy usage on industrial production is

examined with the relationship of economic growth during 1970 to 2012. In that study

regression model has been used to estimate the impact of energy consumption on economic

growth in an industrial area. They consider economic growth rate and energy consumption as

variables. Regression analysis gives the estimation that over all models is significant. There is

a relationship of economic growth and industrial energy consumption. Positive value

coefficient is reflected in industrial energy consumption has a positive impact on economic

growth. They suggest that policy makers should consider the economic growth rate of the

country and according to that increasing the energy needs and energy resources. Further

researcher may take another variable related to industrial energy consumption to find the

impact to economy growth.

Acaravci (2010) empirically investigate about the causes issues of long run and short run

among electricity consumption and economic growth in Turkey during 1968 to 2005.In that

study vector error correction model and co-integration test has been applied to find the causes

of effectiveness on gross domestic product by electricity consumption in Turkey. He consider

electricity consumption and GDP per capita as research variables.. He reject the null

hypothesis because electricity consumption per capita does not cause or degree of

dependency on GDP per capita He suggest that policy makers should continue and identify

the new resources for electricity supply and also researcher may take a hydroelectric power

plants and thermal power plants as variables in the research.

.

Aziz (2005) examine the impact on economic growth of energy consumption and growth In

Malaysia during 1970 to 2009.In that study co integration and vector error correction model

have been applied. He consider energy consumption, energy prices ,real income ,aggregate

output as variables .There is good favor and opportunity for long run relationship between

energy variables that is price and consumption and economic growth at 1% level of

significance. They suggest that researcher may use multivariate models for research .

Rufael and Menyah (2010) empirically investigate the nuclear energy impact on consumption

and also on real gross domestic product for nine developed countries during 1971 to 2005. In

that study Granger causality test and some part of VEC has been applied They consider

nuclear energy consumption, real GDP, , real gross fixed capital formation and labor force.

Different and opposite causality is present from economic growth to nuclear energy

consumption in Canada and Sweden. In Spain, Uk and USA there is an increase in nuclear

energy consumption may cause the increase in economic growth. While in, France, Japan,

Netherland and Switzerland there is an increase in nuclear consumption may cause to

decrease the economic growth. They suggest that policy makers should take steps on nuclear

safety variable .And the clean energy may also the driven force toward the economic growth.

Vilahinic, et al. (2010) analyze the causes of relation among the energy and economic

growth in Croatia during 1993 to 1996.In that study bivariate of real gross domestic product

and normality test has been applied. In normality tests they use Jarque_Bera test, Lilliefors

and Shapiro test to find out the significance among the variables. They consider GDP,

energy consumption in industry and house hold, oil consumption, primary energy

consumption and net energy imports as variables in the research. If there is an increase in oil

consumption with a leg then GDP is also increases. If gross domestic product is increase it

also affect the rise in oil consumption.. They suggest that their research shows the relatively

low energy intensity in Croatia so policy makers and researcher can do same research in

developing countries. In the future it may be good to investigate causes for a long time span

and high frequency data.

Hannesson (2009) analyze the relationship between the growth in energy use and the growth

of Gross domestic product during 1950-2004.In this study linear regression of the growth rate

in energy uses on the growth rate of GDP, GDP per capita and the oil prices .He consider

growth rate in the use of energy, growth rate of real GDP,per capita GDP and the oil prices as

variables. There is a significantly positive relationship between growth in energy use and

growth in GDP for all countries. There is a significantly negative relationship between

growth in energy use and oil prices. Variation in oil prices has not significant affect on the

growth in energy. He suggests that the growth in energy use become less sensitive to GDP

growth as countries become richer.

Adjaye(2000) empirically estimates the relationship between energy consumption and

income in India, Indonesia, Philippines and Thailand during 1974-1988.In this study co

integration and error correction modeling techniques has been used. He consider real income,

energy consumption and prices. The study results do not support the view that energy and

income are neutral with respect to each other, with the exception of Indonesia and India

where neutrality is observed in the short-run. He suggests that the high level of economic

growth leads to high level of energy demand. At the same time, efforts must be made to

encourage industry to adopt technology that minimizes pollution.

Et al (2000) analyze the effectiveness and cause between energy consumption and GDP and

using the data of Taiwan during 1954-1997.In this study Granger’s test is used to .It is very

convenient detecting the presence of effectiveness and causes between two variables. They

consider GDP, energy, coal ,oil ,gas and electricity .All variables were statistically

significant. The causal results are sensitive to the structure of the independent variables. They

suggest that there is a bi directional effect and causes between total energy consumption and

GDP.

Zhang (2003) investigating the relative importance of structural change and real intensity

change in China’s energy consumption during 1980-2000.In this study The Laspeyres method

and Divisia method are the two most commonly used decomposition methods. It has been

applied to find the energy consumption details. He consider the China, energy, structural

change and energy intensity change as variables in this research. The overwhelming

contributor to the decline in industrial energy use in the 1990s was the decline in real energy

intensity, indicating that the trend of real energy intensity declines in the 1980s.He suggest

that researcher may use different models for further research.

Fatai,et al.(2004) analyzed the close relationship between energy consumption and real GDP

growth suggest that energy conservation policies are likely to affect real GDP growth during

1960-1999.In this study Engle-Granger representation theorem which establish the

relationship between cointegration.They consider GDP ,coal ,gas electricity as the variables

in this research.

Found that neither bidirectional nor unidirectional link between real GDP and coal, gas and

industrial energy demand. They suggest that there is close relationship between energy

consumption and GDP growth so government of these 4 developing countries should take

care about the consumption demand.

Lee and Chang (2005) empirically identify the linear and non linear effect of energy

consumption on economic growth in Taiwan during 1955 to 2003.In that study there is an

application of the TAR mode has been used. They consider real output, labor force, real

capital stock, real export and a growth rate of energy consumption as a variables. The

external effect appears to be significant and positive for the regime below the threshold,

while it is positive but insignificant for the regime corresponding to energy consumption

above the threshold. They find that energy consumption has a positive influence on economic

growth. They suggest that policy makers when adopt any strategy or method to promote o

conserve energy consumption the role of energy use should not be neglected. This is the case

of relationship between energy consumption and economic growth.

Aqeel and Butt (2001) investigate the relationship between energy consumption and

economic growth and on the other hand energy consumption and employment in Pakistan

during 1955 to 1956 and 1996 to 1996In this study co-integration techniques, Hsiao’s version

of Granger causality and test for unit root has been used. to find out the relationship between

energy consumption and economic growth. They consider GDP, total energy consumption,

employment as variables. Economic growth leads to petroleum consumption. On the other

hand neither economic growth nor gas consumption affects each other. And with respect to

electricity, electricity consumption leads to economic growth without feedback. They suggest

that the energy conservation policy has no harmful effect on Pakistan economy. Researcher

may take other variables for further findings.

Abbasian, et al.(2010) investigate about the causal relationship among the energy

consumption and economic growth in the Iranian economy during 1965 to 2005.In that study

VAR version of Granger and other causality test has been apllied to find out the impact of

energy consumption directional and un directional on Iranian economic growth.They

consider energy consumption and economic growth as variables. Enregy consumption is

related to labor and capital and it has been effect on economic growth.They suggest that

policy makers should take another variables related to energy consumption in which there is

no work done in Iran which may have an impact on economic growth in Iran.

Belke, Et al. (2010) emperically estimate the relationship between energy consumption and

economic growth with repect to long run term and the data is coming from 25 developed

countries during 1981 to 2007.In that study unit root test and co integration analysis has been

applied to find out the impact of energy consumption on economic growth.They consider real

gross domestic product per capita, enetrgy prices and energy consumption has been used a

variables.There is a mutual causal relationship between energy consumption prices and

economic growth.They suggest that researcher may take international developments about the

energy consumption as a variable rather then local factors.

Hou(2009) investigate the relationship between energy consumption and economic growt in

Chaina during 1953 to 2006.In this study,cointegration test and Hsiao’s granger test has been

used to find out the relation among economic growth and energy consumption.They consider

real GDP and energy consumption as varaibles.Tests conclude tha energy consumption cause

economic growtha and economic growth causes energergy consumption repectively.He

suggest to policy makers that they shoul pay attenetion towards the energy use with

circulation point of view.

Li and Li (2011) investigate a causal relationship between coal consumption and economic

growth of Chaina and India during 1965 to 2006.In this study Granger causilty test has been

used to find out the causal relationship.They consider Coal consumption and gross domestic

product as varables.There is an undirectional causilty relationship found from GDP to coal

consumption in Chaina on the other hand, from coal consumption to GDP in India.They

suggest that researcher should work on coal consumption variable further because of less

research work done by others.

Gbadebo, et al. (2009) investigate the relationship between energy consumption and

economy growth in Nigeria during 1970 to 2005.In this study co integration technique has

been used to analyze the relationship among the energy consumption and economic growth.

They consider GDP, coal, consumption, crude oil consumption, electricity consumption,

labor force and gross fixed capital formation as variables. Coal consumption is positively

related with economic growth.Petrolium has a high correlation with economic growth.

Increase in energy consumption has a strong determination of economic growth in the

country. They suggest to policy makers that all sectors may have an intention to see the usage

of energy and also the requirement of power generation.

3) Methodology

This chapter talk about the correct facts and figure about the related research.

3.1) Research Approach:

For this research Quantitative approach will be use to analyze the correlation between

dependent variable and independent variable. Quantitative approach talk about the collection

of data, inspecting of data in numeric forms and it is relatively large scale of sufficiency

about gathering facts in this type of study.

3.2) Research Purpose:

The explanatory research is used in this research. In this type of research, research mention

each variable with fully explanation and also mention about the effectiveness of one variable

to other variable. In this study like independent variable like foreign direct investment how it

impact on dependent variable (electricity consumption).

3.3) Research Design:

The design of this study talk about the importance of electricity consumption, and it is also

examine the correlation to conclude that what significant and how much significant between

dependent and independent variables. This study of research is base from co relational

research design which have multiple regression analysis.

3.4) Data Source:

In this specific research secondary source of data is required, since annual data pertain to

dependent variable (electricity consumption function) and independent variable (FDI,

Population Growth, income)

In this research the World Bank Secondary source data is used. There is a big reason for

choosing this source is that all data easily available in this data basis are authentic and

reliable which is compiled by experienced and professional’s persons.

3.5) Period

To check out the impact of electricity consumption on FDI, Population growth and income of

Asia data is collected from the period of 1980 to 2010.

3.6) Statistical Techniques/ Tools:

In this research simple regression technique is used with the help of time series data, as we

have analyze or find out the relationship between electricity consumption, foreign direct

investment , population growth and income.

3.7) Model:

On the basis of research questions and techniques, the following model is derived to examine

and check out the relationship or impact of electricity consumption on foreign direct

investment, population growth and income, we use regression and co integration analysis.

Regression test is used when we have to find out the relationship between the dependent

variable and one or more independent variable.

The statistical model of the research is given below:

Y=α0 +β1X1+ β2X2+ β3X3+et

i.e,

EC= α0+ β1FDI+ β2PG+ β3I+ e _____________________1

Where,

EC= Electricity Consumption

FDI=Foreign Direct Investment

PG=Population Growth

I= income

3.8) Hypothesis:

Ho1 Foreign direct investment has significant impact on electricity consumption.

Ho2 Population growth has significant impact on electricity consumption.

Ho3 Income has significant impact on electricity consumption.

3.9) Variable Description:

In Variable description Details about the variables are mention in this research are given

below.

1. Electricity consumption:

Electricity consumption is a non-scientific phrase often used to explain the conversion of

electrical energy into mechanical work, for example heat or light. Now a day’s electricity

becomes the biggest energy source. It is helpful for consumption purpose in industries,

manufacturing, transportation and house hold sectors. Electricity can be got from power

generation plant with the help of gas.

2. Foreign Direct investment

Any investment which is come from the outside of the country from any single person, group

or company in a money foam is called Foreign Direct investment.

3. Population Growth:

Population Growth can be define as the Increase in the number of people who live in a

country, territory ,state or a sudden raise in the relatives number of population.

4. Income:

Income can be defined as the income of any single person, individual or group , for example

if your income rise 5% greater then the previous year and the inflation for this year was 2%

then your real income increase around 3% only. If your income increase in 2% and inflation

increase in 4% then your real income decrease in 2%.