What are real and nominal incomes of the population in simple words

You've probably noticed that in different years you can afford to purchase different amounts of goods and services with a certain amount of money. For example, in 2010 you could buy 5 kg of meat for 1,000 rubles, but in 2021 the money you pay is much less, although the amount of money has not changed. All professional economists are well aware of this paradox. And that is why they distinguish between real and nominal income. Below we will find out what types of income there are, and also find out what the dynamics of real income of the Russian population is.

Definition

Income is the total cash payments, goods and services that an individual or legal entity receives over a certain time (most often, the calculation takes a period of one year). Cash income of the population is a set of tangible and intangible assets produced by one’s own household in a specific time period. In addition, these include funds received from external sources.

Income is classified into several main types:

We calculate the rate of marginal profit

Marginal profit rate = ((sales revenue - variable costs) / sales revenue) * 100 The
NPP indicator is expressed as a percentage and, in essence, means the share in revenue that profit makes up before depreciation and amortization and other operating expenses (fixed costs).

For example, if a company sold $10 million worth of products, and the variable costs of goods sold were $5.5 million, then the marginal profit margin (MPR) would be 45%:

NPP = (($10 million – $5.5 million) / $10 million) * 100 = (4.5 / 10) * 100 = 45%.

It is clear that a high marginal profit rate does not always guarantee a high net profit, since the matter is greatly influenced by fixed costs.

Barry Pearson and Neil Thomas give the following example in their book The MBA Short Course. Several years ago, an electronics company established a subsidiary to manufacture and distribute silicon chips. From the very beginning, it was clear that we would have to invest a significant amount in this project and work at a loss for the first time. In order to ultimately recoup the project, the production capacity was initially set to be quite large. And this entailed the number of service personnel - large fixed costs. The company started operating, and in the third year the marginal profit rate reached 74%. This means that variable costs (raw materials, materials, etc.) amounted to only 24%. But the plant’s capacity was still not fully utilized, that is, for the most part it was idle. Therefore, fixed costs were still very high and amounted to 205% of revenue. In fact, the company was spending almost 2.5 times (231% of revenue) more money than it was taking in. And the net loss was 131% of sales.

But the following year, sales tripled due to a sharp surge in demand for a certain type of device that used chips produced by the company. And the company began to operate profitably.

Nominal income

Nominal income refers to absolutely all receipts of monetary amounts for a certain period of time and consisting of the total amount of material goods and money that replenished the budget. The sources that form the nominal budget can be very different. The main ones are:

• profit received while doing business;
• wage;
• rent received by the property owner;
• social payments;
• payments received under government programs;
• profit that was generated by increasing the value of securities (stocks, bonds);
• funds borrowed from a bank;
• lottery winnings;
• payment of compensation;
• income from the sale of personal belongings.

Analysis of the results obtained

There are three main ways to analyze the net profit received, on the basis of which you can plan changes in the operation of the enterprise in the future:

• Vertical and horizontal analysis of indicators - tracking changes in indicators and items of financial statements over a certain time.
• Trend – comparison of the dynamics of changes in profit and other indicators in the reporting period with the previous or base one.
• Factor analysis is the search and consideration of external and internal factors that could affect the amount of profit received. Factors must be presented in the form of coefficients. Using all the above information, you will be able to evaluate the performance of your company and plan its further growth.

Using all the above information, you will be able to evaluate the performance of your company and plan its further growth.

The productivity indicator of the production activity of the working personnel is extremely important for the successful functioning of the enterprise. This coefficient can be calculated mathematically. Labor productivity: the calculation formula and examples of calculations are given in this topic.

What is labor intensity and how to calculate it, see this page.

Real income

Unlike nominal income, real income represents all financial income, taking into account factors influencing the possibility of purchasing a certain amount of services and goods that are purchased with this money. That is, this is the value obtained by dividing nominal income by the current inflation rate. The sources of real income are identical to nominal ones.

Real profitability is expressed in natural form by benefits and goods that can be purchased at real prices. It is an indicator of the subsistence potential of a certain source of profit and is regulated by current prices. The real income of the population is considered part of the national income.

To determine the level of real income, it is necessary to combine all cash and natural incomes of citizens. This amount includes: salaries, pensions, fees and other sources of profit. The amount of deductions to the state budget, voluntary contributions to various organizations, deposits and payments for utility services are subtracted from the resulting indicator. The result will be the level of actual income on which people live in a given period of time.

Bonds: price and factors influencing it

The price of a bond can be influenced by various factors, namely:

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

Of course, the value of a bond is greatly influenced by the interest rate set at the time of issue, the determination of which in turn is influenced by the nominal value of the bond and the 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 profitability. So, if the coupon yield is 12% per annum and an alternative investment option can provide the same income, then the bond should be sold at the nominal price.

Distinctive features

At different times, a person, receiving the same nominal income, has the opportunity to buy different quantities of things or services for the same amount of money. Several factors influence the growth or decline of real yield:

For example, when taxes increase, in order to avoid going bankrupt, most entrepreneurs will raise prices for their goods and services. This will lead to higher prices and will greatly affect the number of things and services that a person can afford for a fixed salary.

Under what conditions does real income increase? When tax rates are reduced, a person will receive more money. The difference in the amount will provide the opportunity to purchase additional goods and services, which means that when taxes are reduced, real income increases.

When an individual has a fixed income, the real return will always be less than the nominal return due to the depreciation of money during inflation.

It is necessary to understand the importance of financial relations in daily work, and under what conditions nominal profit increases. To increase it, you need to use preferential services and goods. In addition, you need to improve your professional qualifications, which will contribute to higher wages.

The volume of total payments from citizens to the state budget is directly dependent on the amount of material goods available in the reserves of each family. Such material goods are considered: real estate, plots of land, cars, etc. These components significantly improve your financial situation. The monetary assets in the use of every citizen are of great importance. The well-being of people directly depends on real profitability.

To increase the level of nominal income, citizens sell their services on the labor market, engage in business, or sell household products. Increasing the profitability and well-being of the population is the task of the government, which is implemented by effective management of the financial system and the correct conduct of monetary policy.

The higher the rate of inflation, the less a person can purchase goods and services with his earnings. A sharp decrease in the real income of the population causes hyperinflation, which leads to a fall in income and a rapid decline in the standard of living of all citizens.

Inflation

The concept of “real nominal income” was discussed in detail above. Inflation can significantly adjust the level of profitability because, in simple terms, money depreciates. This happens due to rising prices against the background of the previous level of income. Inflation is not a banal jump in prices, but a long-term and complex situation regulated by the state through the use of various economic instruments.

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 entire society.

A decrease in real income occurs when the growth of nominal income is lower than the rate of inflation. As a result, anyone can suffer: a person receiving a fixed income (state employee, pensioner), the owner of a savings deposit, as well as a creditor.

It turns out to be in an advantageous position:

• an entrepreneur whose finished product price is growing faster than the resource required for its production;
• debtor;
• a state that pays its obligations with depreciated money.

So, the inflation “tax” will have to be “paid” by recipients of fixed amounts, and the “subsidy” will go to those whose cash incomes increase faster than inflation. The result is that income and wealth are redistributed.

The value of population income for a country

The real income of the population is one of the most important indicators for the government of the country, with the help of which the degree of material security of all citizens is determined. In addition, this indicator can influence the growth of worker productivity. Therefore, new methods for calculating the standard of living indicator are regularly explored.

The amount of real profitability of a society affects the social climate in the state. With the growth of material wealth of the population, the general standard of living of the state improves. To do this, it is necessary to comply with the only condition - to evenly distribute real income to the entire population of the country.

Real income is an economic indicator that allows you to effectively adjust the quantitative profits that all segments of the population receive and develop new ways to improve the standard of living in the state. The higher the material condition of society, the more stable and in larger volumes payments to the state budget will be received.

The relationship between real and nominal income is expressed by the formula: DR = DN / C. Where:

1. DR – real profitability.
2. DN – nominal yield.
3. C – absolute price level.

Product cost

Cost refers to the cost of resources, human labor and equipment spent on the production of a particular product or service.

It also includes the costs of storing manufactured goods and transporting them.

Reducing costs is one of the main ways to increase profits.

But in the pursuit of excess profits by reducing costs, one should be careful and ensure that the quality of what is produced remains at the same level; low-quality products are less competitive.