Econ 2006 January 25

# Econ 2006 January 25 - 1 (2003 dollar) = 1 (base year...

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Econ 2006 January 25, 2008 The previous day continued……………. An example from the previous day. Example : suppose that the 2003 nominal (dollar) wage in freedonia is W=\$3.50/ labor. What does this mean to workers? Is an individual working just to accumulate dollars per se? The real wage One can use the CPI to calculate a real wage Let P = (price index)/ 100 Definition: a real variable is (nominal variable)/ P Using the CPI as the price index, one has 2003 real wage = (2003 nominal wage)/ P Dividing the 2003 nominal wage by the price level P corrects for the effects of inflation and tells you what the 2003 nominal wage is worth in the base year Example: Suppose the 2003 CPI is 175. Then 2003 real wage = (\$3.50/1.75) = \$2.00 Making \$3.50 in 2003 is equivalent to making \$2.00 in the base year of 1983 Note: That the 2003 CPI = 175 tells us that 1 (base year dollar) = 1.75 (2003 dollars), or equivalently

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Unformatted text preview: 1 (2003 dollar) = 1 (base year dollar)/ 1.75 So. \$3.50 in 2003 = (\$3.50/1.75) = \$2.00 in the base year The real wage is also called a constant dollar wage because it measures the Examples: Year Nominal Wage CPI Real Wage 2000 \$2.00 125 2003 \$4.50 250 What was the growth in money wages from 2000 to 2003? (4.50 2.00/ 2.00) x 100 = 1.25 x 100 = 125 What was the inflation from 2000 to 2003? (250 125/ 125) x 100 = 1.00 x 100 = 100% What was the real wage in 2000? 2003? Real wage in 2000: \$wage/ (CPI/ 100) = \$2.00/ 1.25 = \$1.60 Real wage in 2003: \$wage/ (CPI/100) = \$4.50/ (250/100) = \$4.50/ 2.50 = \$1.80 What was the growth in the real wage from 2000 to 2003? What does this mean in terms of purchasing power? 1.80 1.60/ 1.60 = .125 x 100 = 12.5%...
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## This note was uploaded on 03/31/2008 for the course ECON 2006 taught by Professor Rdcothren during the Spring '08 term at Virginia Tech.

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Econ 2006 January 25 - 1 (2003 dollar) = 1 (base year...

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