Define Real Income
Difference In Real Income And Money Income Statements
What Is Real Income And Money Income

Wage vs Income

The two words ‘wage’ and ‘income’ might look similar with no difference at all whatsoever, but strictly speaking there is difference between the two words.

Updated July 02, 2021. Universal basic income (UBI) is a government-guaranteed payment that each citizen receives. It is also called a citizen’s income, guaranteed minimum income, or basic income. The intention behind the payment is to provide enough to cover the basic cost of living and establish a sense of financial security for everyone.
The difference between the real income and nominal income is that real income takes into account the effect of inflation whereas nominal income does not take into account the effect of inflation. Real income is calculated after subtracting inflation from the nominal income.

What Is the Difference Between Royalties & Income for Taxes? If you receive royalties in addition to normal income, you pay Social Security tax on your normal income. However, you don't pay it on royalties. They go on a schedule with rental income, IRS 1040 Schedule E, which is not earned income in the eyes of the IRS.

Define Real Income

The word ‘wage’ is often used in the plural as ‘wages’ whereas the word ‘income’ is a collective noun and the form ‘incomes’ is used sparingly. It is used as an uncountable noun for that matter.

Wages is usually paid to you by the hour or in short it can be said wages is a kind of income that is earned by the hour for an agreed number of hours per week. You may for example earn wages of $10 per hour in a factory as its employee.

It is interesting to note that the wages that you earn by the hour are usually paid to you once a week or more recently in a few countries once a month. It is quite remarkable to know that in America wages are paid to the employee or the worker once every fortnight. It is more importantly true that you get paid actually for the number of hours you work and not the number of days you work.

The word ‘income’ is used in altogether a different sense. It conveys the sense of the money that you receive. The money is inclusive of your salary, other earnings by way of extra part time jobs and money earned from interest payments and shares too. Income is usually calculated for the month. Sometimes for auditing purposes income is calculated for the whole year.

In short income can be defined as ‘the money earned arrived at by the sum of all the wages, profits, salaries, interest payments, shares, rents including commercial rents and other forms of earnings as well.’ Thus for salaried people, income refers to the total earnings whereas for organizations and companies income refers to the net profit.

Distinction between Real Flows and Money Flows are as follows:

Unlike a traditional economy where production is mainly for self-consumption, production in modern economy is for exchange or sale. Thus, modern economies have become exchange economies where all exchange activities take place through money. In other words, it is money which acts as a medium of exchange in modern economies. Thus, money flows in the form of income and expenditure among different sections of the society.

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In this context, it will be relevant to know the views of Paul Studenski who states, “National Income is both a flow of goods and services and a flow of money incomes. It is, therefore, called national product as often as national income.” All the flows in an economy can be classified into Real Flows or money Flows. Remember, households are owners of factors of production as well as consumers whereas firms (or producing enterprises) are producers of goods and services.

Real flows:

These refer to the flows of goods and services. These are real because they consist of actual goods and services. When factor services (services of land, labour, capital, enterprise) flow from household to firms which require them for producing goods and services, these are called real flows. Similarly, when goods and services produced by firms flow from producing enterprises to households who buy them for satisfying their wants, these are also real flows. Such flows are continuous and there is no beginning point or ending point in these flows.

Money flows:

These refer to the flows of money in the form of factor payments and consumption expenditure. The money flows occur since it is through money that various transactions are conducted. It is money that facilitates such transactions bringing flows of money from one sector to another.

When factor incomes (rent, wages, interest and profit) flow from firms to households as rewards for their factor services, these are called money flows. Similarly, when households spend their incomes on purchase of goods and services and as result money flows back to firms, these also indicate money flows.

The difference between the real flows and money flows can be explained further with an illustration. Out of three sectors of an economy—household, firm and government—let us for sake of simplicity consider the first two sectors, viz., household and firm. We assume that there is no government, no saving and no investment.

The firm sector hires productive or factor services (land, labour, capital and enterprise) from the households to produce goods and services. This is real flow. The households, in turn, receive factor income (rent, wages, interest, profit) in the form of money from the firm sector. This is money flow.

Difference In Real Income And Money Income Statements

With the money income thus earned, the households purchase from firms goods and services like food, cloth, house, shoes, educational, medical and banking facilities, etc. for satisfying their wants. This is real flow from firm sector to household sector. In return, the households make payment to the firm sector in the form of money. This is money flow from households to firm sector.

What Is Real Income And Money Income

Based on this simplified model, all these flows involved in it are depicted in the following figure. The inner two arrows indicate real flows which show flow of factor services from household sector to firm sector and corresponding flow of goods and services from firm sector to household sector.

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The outer two arrows reflect money flows which show flow of factor payments from firm sector to household sector and the corresponding flow of consumption expenditure from household sector to firm sector.

Define Real Income

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Difference In Real Income And Money Income Statements

What Is Real Income And Money Income

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