Nominal income is what? Nominal rate of return

Nominal income is a value for the calculation of which a pure financial expression is used, but not accountable: the price level, inflation and the purchasing power of money.

Methods for determining the financial inequality

People who exist within the same society have different levels of income, and therefore occupy a different position from each other. Nominal income is an absolute monetary value.

To determine how the income is distributed, use one of the following methods:

• Statistical methods, allowing to determine the value of the average level.
• Formation of groups depending on the amount of income and comparing the average values of the extreme ones.
• The Lorentz curve, the construction of which allows us to determine the magnitude of inequality in society through a cumulative (increasing) effect.

Nominal and real income

Nominal income is the entire 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 variable in time nominal (real) level of income through the price index. That is why the initial base period assumes the coincidence of these types of income, and then the price change is calculated during a certain time period, which results in a difference between the nominal and real income in the current period.

The essence of nominal income

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

The importance of the income received can be assessed depending on the activity and level of use. The real income is:

• From funds received from doing business;
• From wages;
• From scholarship payments;
• From social benefits;
• From a pension;
• From dividends received from securities;
• From other income received, for example, from the sale of real estate or rural land.

Based on the amount of profit, you can talk about the welfare of each individual citizen and how much he can satisfy the whole spectrum of his spiritual and physical needs. The magnitude of income is affected by such factors as: wages, earnings from bonds, the level of prices in the market and the meaning of its fullness.

About the sources

Nominal income grew? Anything can happen, especially if there is any fluctuation in the source. For example, salaries, profits from owning securities or the amount of rent for rented property have increased. 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, a decent salary has a positive effect on diligence, responsibility and work discipline. If the state aid is unreasonably high, it 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 based on a government program;
• Profit from the growth of the security;
• Bank loan required for the construction of a house;
• A loan to a member of the consumer community;
• Lottery winnings;
• Various penalties or fees;
• Availability of temporarily free finances formed as a result of the purchase of goods on credit;
• Other income received from the sale of personal movable property.

In addition, the composition of the nominal income includes such mandatory payment, as tax. These payments are the source of the formation of additional resources and distribution of capital.

Types of income

The income of the population is money and natural resources received during a certain period of time. The first include any financial receipt: the profit of the entrepreneur, the salary of the employee, allowance, pension, scholarship, interest, dividends, rent, and also the amount from the sale of a security, real estate or agricultural products, etc. The budgetary survey of the family, conducted by state statistics, does not take into account the increase in the contribution on the savings book.

Natural income is the production of such spheres of the household as farming, cattle breeding and poultry farming. In addition, here you can include any products, services and other goods in kind (pcs., Kg, hour), received from a garden or garden plot, a private farmstead. To the same category are self-harvesting gifts of nature, intended for personal consumption (not commodity form).

Inflation

The notion "real nominal incomes" was dis- cussed above. Inflation can significantly adjust the level of profitability, because, in simple terms, money is depreciating. 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 complex situation governed 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.

The decrease in real income happens in the event that the growth of nominal income is lower than the rate of inflation. As a result, anyone can suffer: a person who receives a fixed income (a state employee, a pensioner), a holder of a savings deposit, and a lender.

In a favorable position it turns out:

• Entrepreneur, the price of finished products which grows faster than the resource necessary for its production;
• debtor;
• A state that pays for its obligations with depreciated money.

So, the inflationary "tax" will have to "pay" to recipients of fixed amounts, and "subsidization" will be paid to those whose monetary incomes increase faster than inflation. The bottom line is that income and wealth are redistributed.

The procedure for calculating real income

Almost everyone knows that real profit is understood as income minus inflation. The increase in prices occurs with respect to any products, goods, services. Statistics show that in the past 15 years there has been a 5-fold increase in prices. This can be explained by a simple example: for money, all this time lying under the mattress, you could buy 5 apples earlier, and now only 1.

In order to preserve purchasing power, people try to invest their savings in a financial instrument - deposit, currency, real estate. More advanced involve stocks, bonds and precious metals.

The nominal income rate minus inflation is equal to the real yield. Its value can be either positive or negative.

On the value of bonds and coupon income

The current price of a bond is the expected cash flow, in relation to the current time period. The composition of the cash flow includes two components: the nominal coupon yield and the nominal value of the bond.

The cost depends on the following circumstances:

1. Consideration of cash flow in the context of periods during which the coupon yield will be paid, the change of which depends on what conditions took place during the bond issue.
2. The size of the market yield implies taking into account the risk inherent in such investments. The amount of the required yield may vary depending on the period of operation.
3. Each bond has a finite deadline, the offensive of which requires its cancellation.

Bonds: price and factors affecting it

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

• interest rate;
• Popularity and reliability of the issuer;
• Period to maturity;
• Term of circulation.

Of course, the value of a bond is strongly influenced by the interest rate set at the time of issue, which, in its turn, is influenced by: the bond's nominal value and profitability. If the investor has alternative options for investing finance, and other conditions are equal, then the choice will fall in favor of the highest return. So, if the amount of the coupon yield is 12% per annum and the alternative investment option is able to provide the same income, then the bond should be sold at a nominal price.