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

Tennis club, Suppose you belong to a tennis club that has a monthly fee of ...

Suppose you belong to a tennis club that has a monthly fee of $75 and a charge of $5 per hour to play tennis.

Calculate profit-maximizing price and quantity, A monopolist faces the foll...

A monopolist faces the following demand function for its product: Q = 45 - 5P The fixed costs of the monopolist are $12 and the variable costs are $5 per unit. a) What are the pro

Aggregate production function, The aggregate production function Defin...

The aggregate production function Definition Imagine the national economy during a short period of time (say one week). We refer:  L: total amount of work used duri

GDP and GNP, y explain whether you agree or disagree with the following sta...

y explain whether you agree or disagree with the following statements. “If nominal GDP is less than real GDP, then the price level must have fallen during the year.”

What is money has nothing to do with token itself, What is money has nothin...

What is money has nothing to do with token We also consider that what is money has nothing to do with token or commodity itself: USD is money in United States but not in

What is effective demand, Effective Demand The concept of effective dem...

Effective Demand The concept of effective demand is the logical starting point of Keynes Theory of Employment. Effective demand manifests itself in the aggregate expenditure of

How is economics work with interaction of individual choices, How is econom...

How is economics works with interaction of individual choices? Principles behind the interaction of individual choices: 1. There are gains through trade. • Specialization

Described as a market in equilibrium, Camping at Wilson's Promontory, a nat...

Camping at Wilson's Promontory, a national park in Victoria, isn't free, but for many years now not everyone who wants to camp at Wilson's Promontory during the Christmas holidays

Define price elasticity of demand, Suppose the price elasticity of demand f...

Suppose the price elasticity of demand for used cars is estimated to be 3 what does this mean?

Absolute advantage and comparative advantage, Differences between absolute ...

Differences between absolute advantage and comparative advantage?              Ans) Absolute benefit and comparative benefit are two basic concepts to international trade. Under

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