DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : G.M.Lakshmi
Designation : Lecturer
Institute : Government Polytechnic for
Women, Suryapet
Branch : DCCP
Subject : Business Economics II
Semester :VI th semester
Major topic : Theories of Distribution
Subject Code : CCP-602
Sub topic Meaning of wages-Nominal &

Real wages
Duration : 50 minutes
CCP602.8 TO 9 1

Teaching Aids : Animations and text books

Recap
In the previous session we have learnt about
Meaning and Ricardian Theory of Rent

CCP602.8 TO 9 2
Objectives
On completion of this lesson, you would be
able to know:
 Meaning of wages
 Nominal Wage and Real Wage
Why a separate theory of wages

CCP602.8 TO 9 3
Meaning of wages
The term wages may be used in a wide or a
narrow sense:
In the wide sense it means the payment made
for the services of the labour
In the narrow sense it is taken as the price
paid for physical work done

CCP602.8 TO 9 4
Contd.,

The term labour in economics is used in a very wide

sense
It means any exertion both physical and mental
Thus the term wages is the share of national dividend

which goes to those who work with their hands or

brain whether independently or for an employer

CCP602.8 TO 9 5
Types of Wages:
 Nominal wages

 Real Wages

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Nominal Wages
 Nominal wages are wages paid or received in terms of
money
 To the classical economists the nominal wage was
considered as the function of supply of labour
 It is also known as money wage
 It does not determine the standard of living of the people

CCP602.8 TO 9 7
Real Wages
 Real wages are the luxuries and comforts which can be
purchased with money wage
 It is real wage that gives a correct idea of the economic
position of the worker
 In other words it determines the standard of living of the
people

CCP602.8 TO 9 8
Factors determining the Nominal and
Real Wages

1. The purchasing power of money

 Price level determines the purchasing power

 Eg. A person may receive a high money wage in

Bangalore but his real wage may be less due to high
prices, whereas a person living in rural area may receive
a low money wage but his real wage may be more due
to low prices

CCP602.8 TO 9 9
 Contd.,

2. Extra work without extra payment

 If a person is required to work for extra hours without

extra compensation his real wage may be less to that
extent

CCP602.8 TO 9 10
 Contd.,

3. Regularity or irregularity of the employment

 In case of regular and secure employment though

money wage may be less real wages may be more

 Whereas for irregular and unsecured employment

though money wage may be more real wage is less

CCP602.8 TO 9 11
 Contd.,

4. Conditions of work :
 Some occupations are healthier than others
 Whereas in some the hours of work are shorter than
others and in some others the conditions of work are
more pleasant
 In above cases though the money wage may be less real
wage may be more

CCP602.8 TO 9 12
 Contd.,

5. Future prospects:

 Though the money wage may be less for the present,

but if there is future promotion chances and a rise in
income is expected, the real wage is more

CCP602.8 TO 9 13
Why a separate theory of wages?

The reasons are:

demand and supply theory is not fully applicable

to the determination of wages.

Demand for goods depend on their utility.

CCP602.8 TO 9 14
 Contd.,

Whereas the demand for labour services

depend on their productivity to the employer ,
hence demand for labour needs a special
treatment

Weight and consideration must be given to

human element

CCP602.8 TO 9 15
 Contd.,
In rural areas or backward economies wages are
fixed by a custom instead of competition

Hence the wages vary in different labour markets.

CCP602.8 TO 9 16
 Contd.,
Certain peculiarities in labour necessitate
the separate theory of wages. They are:

1. Labour is not perishable.

Hence worker accepts a lower wage as he

has no staying power.

2. Sometimes a wage increase may result in

increase in labour supply

CCP602.8 TO 9 17
 Contd.,
If wage increases the worker may prefer
leisure to work

It takes much time to increase the supply

of labour.

in relation to its demand

CCP602.8 TO 9 18
Summary
 Wages are payment made for the services of labour

 Money wage: payment made in cash

 Real wage: comforts and luxuries enjoyed with money

wage

CCP602.8 TO 9 19
Quiz
1. Payment made in cash is called _____________
2. Comforts and luxuries purchased with money wage is
called ____________

Answer 1. money wage

2. real wage

CCP602.8 TO 9 20
Frequently asked questions
1. Explain the term wages.
2. Distinguish between nominal wage and real wage.

CCP602.8 TO 9 21
THANK YOU

CCP602.8 TO 9 22