The issue of real incomes measurement
One or two readers have questioned the use of the word real incomes in the context of the article "Using statistical indices to mislead " (RI, March 2008) in that in economic terms this a specifically quantified measure in the form of a coefficient between nominal incomes and nominal prices.
Response: Yes, of course real incomes can be quantified precisely in terms of a specific collection ("basket") of goods or services and a given level of nominal income. We all know of course that there are issues with respect to taste and quality of goods and services as well as the fact that every individual has differing consumption patterns. In the UK alone, with over 60 million souls this are a lot of different aspirations, preferences and consumption patterns. Of course statistically we can try and determine averages and groups of consumption patterns but it is only by chance that some reduced sets of individuals happen to lie at the "average" position.
So even with simple and straightforward quantification there are a lot of problems associated with what real incomes mean. Having said that, the point being made in the article is that a lot what people benefit from in earning sufficient money to spend time following other pursuits is for many the reason for earning income, over and above basic necessities. In such circumstances earning income buys time to do things which quite often are not purchased goods and services and yet contribute to, as far as the individual is concerned, their real income.
It is obvious that this is not quite the formal view of real incomes because the definition is so restricted in that it does not account for, and based upon the normal approach, cannot account for, non-marketed goods and services. If non-marketed goods and services are important to someone, the formal calculation of real incomes is less relevant to them.
In order to make plain this point of view consider the following circumstances:
Two men Boldog and Istvan have distinct preferences in the way they would like to use their time. Boldog likes to spend time developing theories on evolution and this requires a lot of time researching all historic contributions to this field. Istvan loves golf and knows that if he could dedicate more time to this he could improve his score and enjoy the game more. Compare these two situations. Both men work in companies where they are required to work 40 hours each week and they earn £850/week. Boldog's company invest in some new plant and decide that Boldog is the best person to manage this. The plant is so highly automated that Boldog only has to work 2 hours a day or 10 hours a week. Because the plant output with the new system is so high, the company owners decide to pay him what he was paid before for a 40 hour week, after all they don't want to lose Boldog. In other words Boldog receives the same nominal income.
Question: Although Boldog's income remains the same that is his nominal income is static. Both Boldog and Istvan earn enough to cover their essential outgoings. Let us assume that the prices of all goods and services remain completely stable and do not change. The question is, has either of these men's real income changed?
Formally their real incomes remain equal both before and after Boldog's employers upgraded their plant and reduced his hours of work. On the other hand Boldog has available to him a significant amount of time which formally he dedicated to work. Opportunity costs calculations aside, Boldog's ability to pursure what really interest him has significantly increased. On the other hand his ability to take advantage of that opportunity has no relationship to the unit prices of goods and services nor to his nominal income but rather to the fact he has more free time. Since he will "exchange" the time gained to "consume" more time doing something he always wanted to do more of, thus his "purchasing power", with respect to his favourite activity for "consuming time" has increased; so then has his real income.
Istvan, on the other hand, continues to struggle to improve his golf handicap and it is going to take him some time; Istvan is 35 and his ambition is to achieve par by the time he retires.
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