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Nominal Salary: What It Consists Of, How It Is Calculated

 The nominal salary or nominal income , also called monetary salary, is the salary that a worker receives in the form of money. It is measured in terms of money and not your ability to buy products and services. On the other hand, the real salary can be defined as the amount of products and services that a worker can acquire from his nominal salary.


Therefore, the real salary is the purchasing power of the nominal salary. According to classical theories, the job offer is determined by the actual salary. However, according to Keynes, the supply of labor depends on the salary received in terms of money or nominal salary.


The prices consumers pay for products and services, as well as the amount of money they receive for doing work, tend to change over time.


In economics and finance, the term "real" describes a value that has been adjusted for inflation, while the term "nominal" is attributed to values ​​not adjusted for inflation.


What does it consist of?

A nominal salary is simply the amount of money a person earns from their work. For example, if an employer pays a salary of $ 3,000 per month, the nominal monthly salary is $ 3,000. If a worker is paid $ 15 per hour, his nominal wage is $ 15 per hour.


The most important thing to know about a nominal salary is that it is not adjusted for inflation, inflation being the increase in the general level of prices in an economy.


Purpose of real salary

The purpose of thinking of salaries or other values ​​in "real" terms is to be able to compare them with past values ​​in a way that makes sense.


A current worker could earn a nominal salary of $ 4000 a month and a worker 100 years ago could have earned $ 2000 a month, but these values ​​say nothing about the wealth they obtained.


If inflation caused prices to increase by 1000% during the last 100 years, the worker with a monthly income of $ 2000 100 years ago would today have an income of $ 20,000 a month in current monetary terms.


In this case, adjusting for inflation shows that the worker earning $ 2,000 100 years ago could have bought five times more products and services than a current worker earning $ 4,000.


Variations in nominal and real salary

The actual salary earned by a worker can fall over time, even if their nominal salary increases. For example, if you made $ 3,000 a month 10 years ago and you make $ 3,500 a month today, then you make $ 500 more in nominal pay terms.


However, if you can't buy as many products and services with $ 3,500 today as you did with $ 3,000 10 years ago because of price increases, your actual salary has decreased.


Nominal wages and inflation

Because a nominal salary is not adjusted for inflation, it does not accurately reflect the purchasing power it offers. In simpler terms, prices generally go up and a dollar today is worth more than the same dollar tomorrow.


The same is true with nominal salaries. If the wage rate doesn't keep up with inflation, wages won't be able to buy as much.


In fact, even if you receive a salary increase, if the percentage increase in salary is less than the percentage of inflation, then you have even less purchasing power than you had the year before the increase.


To see the effect of inflation on wages, you must determine the real wage, which is the wage rate adjusted for inflation.


The higher your real salary, the more goods and services you can buy with your income. Real wages only increase if nominal wages increase faster than the rate of inflation. If prices rise faster than nominal wages, real wages will fall.


Supply and demand of nominal salaries

Salaries are like any other good and are subject to the law of supply and demand. If the demand for labor decreases and the supply stays the same or increases, then the nominal wage offered by employers as compensation for the work will decrease.


If the demand for labor increases but the supply stays the same or decreases, then the salary demanded by potential employees will increase. Nominal wages stabilize when the supply of labor equals the demand for labor.


How is it calculated?

Nominal wages describe the amount of money earned from wages, without taking inflation into account. Nominal wages do not depend on costs in the economy and therefore do not require any calculation.


Real salary is the amount of income a person earns relative to a past date when adjusted for the impact of inflation. The real salary provides an idea of ​​the real purchasing power that a worker has.


The economic condition of a worker depends on the amount of products and services that he can buy with his nominal salary.


In the event that the prices of products and services double, the worker would need twice the amount of his nominal salary that he currently has to buy products and services.


Therefore, the economic condition of an individual is determined by his real salary. The following is the formula to determine the actual salary:


Real salary = nominal salary * (1+ 1 / P)


In this expression P =% inflation in prices in the period.


Differences between nominal salary and liquid salary

The nominal salary is the total payment that the company makes to the worker. It is the cost to the company in direct monetary terms.


The net salary (or net salary) is the money that the employee actually receives in his hands.


It is the amount of the nominal salary that remains after having deducted from the payroll all withholdings and deductions from a person's salary.


Net salary = nominal salary - withholdings - mandatory deductions


The deductions and withholdings that can be taken from nominal pay to finally arrive at net pay include (but are not limited to) the following:


- Income taxes.


- Social security tax.


- Unemployment tax.


- Health insurance deductions.


- Pension deductions.


- Repayment of loans or advances of the company.


- Deductions from charitable donations.


- Garnishments for child support.


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