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

Explain the says law, Q. Explain the Says Law? GDP, and Say's Law ...

Q. Explain the Says Law? GDP, and Say's Law Aggregate supply Y S = f(L, K) in the classical model where L is concluded in the labor market while K is

Ratios, How to find fixed costs for capacity ratio calculating from annual ...

How to find fixed costs for capacity ratio calculating from annual report?

Main causes of inflation in an economy, Question 1: Differentiate betwe...

Question 1: Differentiate between income, price and cross elasticities of demand. How will the concept of price elasticity be useful to the owner of a supermarket who wan

Gross domestic product, GDP is an important indicator of a nation's economi...

GDP is an important indicator of a nation's economic performance. It has many components which contribute to the growth of the economy. Oil is a minor component of GDP and therefor

For product price elasticity of demand, You are the manager of a firm that ...

You are the manager of a firm that receives revenues of $50,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -3,

Ricardo Viner Model, How does the Ricardo Viner diagram react when once pri...

How does the Ricardo Viner diagram react when once price changes, effects on real wages, and labor allocation?

Discuss about the keynesian economists, Discuss about the Keynesian economi...

Discuss about the Keynesian economists The Keynesian economist A. W. Phillips developed short-run Phillips curve analysis in the 1950s. Phillips had researched the relationshi

OPEN-MARKET MACROECONOMICS, Macroeconomics: Question 1 and 2 relate to cont...

Macroeconomics: Question 1 and 2 relate to content and skills covered --- OPEN-MARKET MACROECONOMICS: BASIC CONCEPTS , International Trade and Exchange Rates Question 3 relates to

Society seeks for monopolists, Society seeks for monopolists to operate at ...

Society seeks for monopolists to operate at the point where _______ = MC which is the lowest point on the ATC curve (the most efficient). A) D B) ATC C) MR D) AVC

Gdp price index, Determine the GDP price index for 1984, using 2005 as the ...

Determine the GDP price index for 1984, using 2005 as the base year

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