Define the real wage, Macroeconomics

Assignment Help:

Q. Define the Real wage?

Consider the following scenario. You work full time and during January 2008 you make 2000 euro after tax. A certain basket of goods and services costs 100 euro in January that means that your salary will buy you 20 such baskets.

In February, you receive a 10% wage increase and you make 2200 euro after tax. Does this imply that you can purchase 10% more baskets - which is 22 - in February? Well, not essentially.

Number of baskets that you can purchase in February depends on the possible changes in prices as well. If price of a basket increases by 3% to 103 euro your 2200 will buy you 2200/103 = 21.36 baskets of 7% more than in January. Albeit your wage has increased by 10%, you can only increase your consumption of baskets by 7%. We say that real wage has increased by 7%.

Officially, we define real wage as the nominal wage divided by a price index (characteristically CPI). In the instance above, your real wage was 20 in January and 21.36 in February if we use the price of basket as a price index. Remember that nominal wage will tell you your wage in units of currency whereas the real wage will tell you your wage in baskets of services and goods and this is more significant to us.

So we care about increases in real wages not in the nominal wages. If you found out that Ken who works in another country, got a 50% increase in his wage every year, you can initially be quite happy for Ken. If you then found out that inflation in country where Ken works is 70%, you should actually feel sorry for him. His real wage is 1.5/1.7 = 88% of his real wage year before - a real wage cut by 12%.


Related Discussions:- Define the real wage

Draw supply and demand diagrams curves , Using supply and demand diagrams, ...

Using supply and demand diagrams, plus explanations of why you have drawn the supply and demand curves the way you have, explain why, in most cases. a) Garbage collectors earn mor

Price of dvd players decreases, If the price of DVD players decreases, we c...

If the price of DVD players decreases, we can expect that the demand for DVDs will: a. increase. b. be unaffected. c. shift left. d. Decrease

Long run imports will most likely be paid, In the long run, imports will mo...

In the long run, imports will most likely be paid for with: a. Aexports. b. The sale of real and financial assets. c. the extension of credit. d. higher domestic unempl

Monetary policy, what is the importance of credit multiplier

what is the importance of credit multiplier

Economics 10, The demand for money schedule shows that the quality of money...

The demand for money schedule shows that the quality of money that people want to hold

Define individual consumer and total producer surplus, Define the individua...

Define the individual consumer surplus and total producer surplus. Individual consumer: Individual consumer surplus is the net profit to an individual buyer through the purc

Firm''s total revenues, How much will your firm's total revenues (revenues ...

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Long-run aggregate supply curve, Suppose the potential level of real domest...

Suppose the potential level of real domestic output (Q) for a hypothetical economy is $160 and the price level (P) initially is 200. Use the following short-run aggregate supply

Circular flow of income in a closed economy, circular flow of income in a s...

circular flow of income in a single sector,two sector,three sector and four sector

Number of unemployed remained the same, In a particular month, the labor fo...

In a particular month, the labor force is 130 million, there are 9.1 million unemployed workers, the job -losing rate is 3% per month, and the job-finding rate is 40% per month. Ho

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd