We’re not saying your income isn’t real...we’re just saying it’s nominal.
Your paycheck every month is in nominal dollars, i.e. just the dollar amount. If that’s the case, what’s your real income? The truthful income?
Your income is only as good as prices. If you make $8 per hour and the average burger costs $8, you can have a burger per hour you work. However, if burger prices double to $16 per burger, now you can only get half a burger per hour you work. Now your boss gives you a raise to $16. You feel a sense of joy and pride. Think of all the things you could buy. Well, tough luck, because you didn’t get a real raise, just a nominal raise. Now you’re back where you started: you can by one burger for every hour you worked.
When prices and income go up, it’s because of inflation. To get your real income, we have to calculate out the inflation part. That leaves us with a sense of what the money can actually buy...what we call “purchasing power.”
In the example above, your nominal income rose from $8 per hour to $16 per hour. Your nominal income doubled. But, if prices doubled during that time period too, then your real income didn’t rise at all. Your real income stayed the same.
Next time you get a raise, take a look at your country’s inflation rates to see if your real income (your purchasing power) actually went up too (or not).
Another thing to keep in mind: prices don’t all rise at the same rates. For instance, in the U.S., the real cost of college has gotten increasingly expensive compared to other baskets of goods, like rent, food, and transportation costs. Which means that, when your mom tells you she was working a part-time job paying for college, you can tell her college is more expensive now than it was then...and not just nominally, i.e. not just because of inflation. It’s actually more expensive in real terms.
Check out the Consumer Price Index published by the Bureau of Labor Statistics to see this in action. It tracks the real costs of baskets of goods over time. Oh, and look up your raises and inflation, to make sure you’re real income isn’t going down too much.
Related or Semi-related Video
Finance: What is stock based compensatio...7 Views
Finance a la shmoop What is stock based compensation While
investors want management with skin in the game when your
ceo has ninety eight percent of her net worth tied
up in the stock of the company that she's running
well presumably she runs it better or at least in
theory anyway So over time management has been paid in
equity ownership grants as well as in cash that is
company management gets paid in stock options and in stock
or rather shares of the company simply granted to them
in lieu of cash Why do companies not just pay
cash while they want management toe Have that whole ownership
thing going for them to act like owners You know
not just like union employees They want management with direct
stakes in how well or pa poorly the business per
forms in the long run and think about the dynamics
of a ceo getting paid even a relatively huge million
dollars a year in salary and nothing else that's it
well that ceo takes a company from four hundred million
dollars in sales and thirty million in profits to five
years later two billion dollars in sales and for three
Hundred million in profits that is the ceo made the
company at least ten times more valuable certainly ten times
more profitable and in five years that's really good But
that ceo just got their single million dollars a year
each year along the way Well that ceo would not
have financially participated personally in making shareholders so much wealthier
and that's not fair right If management of the company
makes huge returns for investors doesn't it seem right that
management should have huge returns for themselves and not just
a basic salary and male Maybe a little bit of
a bonus there too well some companies loan money at
low interest rates to ceos and other top execs so
that their ableto buy shares in the company leveraged well
Other companies just grant shares to management and still others
just grant stock options is kind of a spiff above
their cash compensation So yeah it's all about having skin
in the game which if you play football without sufficient 00:02:11.45 --> [endTime] padding is a definite possibility
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