KW_Macro_Ch_06_Sec_04_Inflation_and_Deflation

KW_Macro_Ch_06_Sec_04_Inflation_and_Deflation - chapter 6 >...

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>> Macroeconomics: The Big Picture Section 4: Inflation and Deflation chapter 6 Earlier we said that the average worker in 2002 earned about three times as much as the average worker in 1948, after correcting for higher prices of goods and services. That’s an important qualification. If we don’t correct for the higher prices of goods and serv- ices, the rise in wages from 1948 to 2002 appears much larger—increasing by a factor of 20 rather than by a factor of only 3. This example illustrates an important distinction in macroeconomics: the distinc- tion between nominal versus real. A nominal measure of something, such as nomi- nal wages, is a measure that has not been adjusted for changes in prices over time. So we say that nominal wages have increased by a factor of 20 from 1948 to 2002. By comparison, a real measure of something is a measure that has been adjusted for changes in prices over time. So we say that real wages have increased by a factor of 3 from 1948 to 2002. Economists typically express wages in real terms because the real wage is a better indicator of the actual change in workers’ purchasing power over time: it captures how much wages have changed over and above the change in the prices of goods and services that workers buy. So although nominal wages rose by a A nominal measure is a measure that has not been adjust- ed for changes in prices over time. A real measure is a measure that has been adjusted for changes in prices over time.
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factor of 20 in those 55 years, workers could buy only 3 times as much in goods and services rather than 20 times as much. To say this another way, an average worker’s wage in 2002, expressed in 2002 dollars— the amount of goods and services that an
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_06_Sec_04_Inflation_and_Deflation - chapter 6 >...

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