Nominal income - what is it? Nominal rate of return

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:55

Nominal income is a value that is calculated using a pure financial expression, and does not take into account: the price level, inflation and the purchasing power of money.

Methods for determining financial inequality

People who exist within the same society have different levels of income, 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 tricks 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 you to determine the amount of inequality in society through a cumulative (increasing) 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 thatultimately the buyer can afford. This is not an absolute value, but a time-varying nominal (real) level of income through a price index. That is why the initial base period assumes the coincidence of these types of income, and then the calculation of price changes over a certain time period is already made, which results in the difference between nominal and real income in the current period.

Essence of nominal income

Usually nominal income is the amount of profit that a person has received or earned during his life. This also includes all types of material assets and services acquired or produced during the same period of time.

The importance of the generated income can be estimated depending on the activity and usage level. Real income adds up:

from business proceeds;
from salary;
from scholarship payments;
from social benefits;
from retirement;
from securities dividends;
from other income received, for example, from the sale of real estate or rural land.

Based on the amount of profit, we can talk about the well-being of each individual citizen and how he can satisfy the full range of his spiritual and physical needs. The amount of income is influenced by such points as: wages, profit from bonds, the price level 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 have increased, profits from holding securities, or the amount of rent for rented property. But basically the nominal income is formed at the expense of state payments. These funds are used to cover social needs: education, medical care and various kinds of benefits.

Nominal income is a huge incentive for the development of society. For example, decent wages have a positive effect on diligence, responsibility and work discipline. If government assistance is unreasonably high, then this can lead to the opposite effect - a person will quickly lose interest in their duties.

Monetary system

In terms of monetary relations, the nominal incomes of the population are divided as follows:

payment based on a government program;
gain from rising security;
bank loan needed to build a house;
loan to a consumer community member;
lottery win;
various fines or fees;
the availability of temporarily free finances resulting from the purchase of goods on credit;
other income from the sale of personal movable property.

In addition, as part of nominal incomeincludes such obligatory payment as tax. It is these payments that serve as a source for the formation of additional resources and the distribution of capital.

Types of income

The income of the population is cash and in-kind resources received over a certain period of time. The former include any financial income: the profit of an entrepreneur, an employee's salary, allowance, pension, scholarship, interest, dividends, rent, as well as the amount from the sale of a security, real estate or agricultural products, etc. The family budget survey conducted by state statistics does not take into account the increase in savings savings.

In-kind income is the output of household activities such as agriculture, livestock and poultry. In addition, this can include any products, services and other goods in kind (pieces, kg, hour) received from a personal or garden plot, personal farmstead. This category also includes self-produced gifts of nature intended for personal consumption (not a commodity form).

Inflation

The concept of “real nominal incomes” has been analyzed in detail above. Inflation can significantly adjust the level of profitability, as, in simple terms, money depreciates. This is due to the rise in prices against the background of the previous level of income. Inflation is not a banal price hike, but a long and complicated situation regulated by the state through the use of various economic instruments.

The most serious consequence of inflation is the redistribution of income and we alth. In this situation, there is a decrease in the purchasing power of money, which as a result damages the entire society.

Decrease in real income occurs if the growth of nominal income is below the rate of inflation. As a result, anyone can suffer: a person who receives a fixed income (state employee, pensioner), the owner of a savings deposit, as well as a creditor.

In an advantageous position is:

entrepreneur whose price of finished products grows faster than the resource needed to produce them;
debtor;
a state that pays its obligations with depreciated money.

So, the inflationary "tax" will have to be "paid" to recipients of fixed amounts, and the "subsidization" will go to those whose money incomes grow faster than inflation. Bottom line - income and we alth are redistributed.

Procedure for calculating real income

Practically everyone knows that real profit means 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: the money lying under the mattress all this time used to buy 5 apples, but now only 1.

In order to maintain purchasing power, people try to invest their savings in any financial instrument - a deposit, currency, real estateproperty. The 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 either positive or negative.

About the value of bonds and coupon income

The current price of a bond is the expected cash flow relative to the current time period. There are two components to the cash flow: the nominal coupon yield and the par value of the bond.

The cost depends on the following circumstances:

Consideration of cash flow by 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 the market return involves taking into account the risk inherent in this kind of investment. The amount of required return may vary depending on the period of operation.
Each bond has an expiration date that requires it to be redeemed.

Bonds: price and factors affecting it

Various factors can affect the value of a bond, namely:

interest rate;
popularity and reliability of the issuer;
maturity period;
term of circulation.

Of course, the value of a bond is greatly influenced by the interest rate set at issue, which in turn is influenced by: nominalbond price and yield. If the investor has alternative options for investing finances, and other conditions are equal, then the choice will fall in favor of the highest return. So, if the coupon yield is 12% per annum and an alternative investment option is able to provide the same yield, then the bond should be sold at par.