Nominal income is a value for the calculation of which pure financial expression is used, and the following are not subject to accounting: price level, inflation and the purchasing power of money.
Methods for determining financial inequality
People existing within the same society have a different income level, therefore, occupy a different position from each other. Nominal income is an absolute monetary value.
To determine how income is distributed, use one of the following methods:
- Statistical techniques to determine the value of the average level.
- Formation of groups depending on the size of income and comparison of the average values of the extreme ones.
- The Lorentz curve, the construction of which allows determining the magnitude of inequality in society through a cumulative (growing) effect.
Nominal and real income
Nominal income is the total amount of financial resources that a person received during a certain period of time.
The concept of real income involves counting the number of goods and services that the buyer can ultimately afford. This is not an absolute value, but a nominal (real) level of income that changes over time through a price index. That is why the initial base period assumes the coincidence of these types of income, and then the price changes are calculated over a certain time period, which gives the difference between the nominal and real income in the current period.
The essence of nominal income
Typically, nominal income is the amount of profit that a person received or earned during his life. This also includes all types of material assets and services purchased or produced over the same period of time.
The importance of income can be estimated depending on activity and level of use. Real income is:
- from funds received from doing business;
- from salary;
- from scholarship payments;
- from social benefits;
- out of retirement;
- from dividends received from securities;
- from other income received, for example, from the sale of real estate or agricultural land.
Based on the amount of profit, we can talk about the well-being of each individual citizen and how much he can satisfy the full range of his spiritual and physical needs. The amount of income is influenced by such moments as: wages, profit from bonds, the level of prices in the market and the value of its fullness.
About sources
Nominal income increased? Anything can happen, especially if there is any fluctuation in the source. For example, wages, profits from owning securities, or the size of fees for leased property increased. But basically nominal income is formed at the expense of state payments. These funds are used to cover social needs: study, medical care and various benefits.
Nominal income is a huge incentive in the development of society. For example, decent wages have a positive effect on diligence, responsibility and work discipline. If state aid is unreasonably high, then this can lead to the opposite effect - a person will quickly lose interest in his duties.
Monetary system
In terms of monetary relations, the nominal incomes of the population are divided as follows:
- payment, the basis for which is any government program;
- profit from the growth of a security;
- bank loan necessary for building a house;
- loan to a member of the consumer community;
- lottery win;
- various fines or duties;
- the presence of temporarily free finance resulting from the acquisition of goods on credit;
- other income derived from the sale of personal movable property.
In addition, the nominal income includes such a mandatory payment as tax. These payments are the source of the formation of additional resources and the distribution of capital.
Types of income
Population income is cash and in-kind received during a certain period of time. The first ones include any financial income: entrepreneur’s profit, employee’s salary, allowance, pension, scholarship, interest, dividends, rent, as well as the amount from the sale of securities, real estate or agricultural products, etc. A family budget survey carried out by state statistics does not take into account the increase in deposit in the savings book.
In-kind income is the products of households such as agriculture, livestock and poultry. In addition, here you can include any products, services and other goods in kind (pcs., Kg, hour) received from a household or garden plot, personal farmstead. Self-procurement of gifts of nature intended for personal consumption (not a commodity form) fall into the same category.
Inflation
The concept of “real nominal income” was discussed in detail above. Inflation can significantly adjust the level of profitability, since, in simple terms, money depreciates. This is due to rising prices against the background of the previous income level. Inflation is not a banal jump in prices, but a long and difficult situation regulated by the state through the use of various instruments of the economy.
The most serious consequence of inflation is the redistribution of income and wealth. In this situation, there is a decrease in the purchasing power of money, which as a result causes damage to the whole society.
A decrease in real income occurs if nominal income growth is lower than inflation. As a result, anyone can suffer: a person receiving a fixed income (state employee, pensioner), owner of a savings deposit, and also a creditor.
In an advantageous position is:
- an entrepreneur whose finished product price is growing faster than the resource necessary for its production;
- debtor;
- a state paying its liabilities with depreciated money.
So, the inflationary “tax” will have to be “paid” to the recipients of fixed amounts, and “subsidies” will go to those whose cash incomes are growing faster than inflation. The result - income and wealth are redistributed.
The procedure for calculating real income
Almost everyone knows that real profit is understood as income minus inflation. Price increases occur in relation to any products, goods, services. Statistics show that over the past 15 years there has been a 5-fold increase in prices. This can be explained with a simple example: for the money that had been lying under the mattress all this time, before you could buy 5 apples, but now only 1.
In order to maintain purchasing power, people are trying to invest their savings in any financial instrument - deposit, currency, real estate. More advanced are attracted by stocks, bonds and precious metals.
The nominal rate of return minus inflation equals the real rate of return. Its value can be both positive and negative.
On the value of bonds and coupon income
The current bond price is the expected cash flow in relation to the current time period. The cash flow consists of two components: nominal coupon yield and bond nominal.
The cost depends on the following circumstances:
- Consideration of cash flow in the context of the periods during which coupon income will be paid, the change of which depends on what conditions were in place at the time of the bond issue.
- The size of market profitability implies taking into account the risk inherent in such investments. The amount of required yield may vary depending on the period of operation.
- Each bond has a deadline, the onset of which requires its redemption.
Bonds: price and factors influencing it
Various factors can influence the value of a bond, namely:
- interest rate;
- issuer's popularity and reliability;
- period to maturity;
- term of circulation.
Of course, the bond rate is greatly influenced by the interest rate set upon issue, which is determined in turn by the face value of the bond and yield. If the investor has alternative options for investing finance, and other conditions are equal, then the choice will fall in favor of the highest profitability. So, if the amount of coupon income is 12% per annum and an alternative investment option is able to provide the same income, then the bond should be sold at a nominal price.