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Calculating the real wage
Let's take a moment to see how the real wage is calculated.
If we have a single product,
calculating it is no big deal.
We simply take the nominal wage and divide that by the price of the
economy's single product.
Think about that.
If the wage is $12 an hour, there is one good that households purchase
(pizzas say), and the price of that good is $8, then how many units of that good can be purchased
with the wage?
Well, 1.5 units right.
If you buy one pizza you spend $8. That leaves $4 from
the money you earned by working an hour.
So if $8 buys one pizza, $4 will buy a half of a
pizza.
That means to find out how many units of this good a person can purchase with the wage
we take $12, the wage, and divide it by $8, the price of a pizza.
Great.
But how do we figure the real wage in a world where there are scads of goods
purchased by the typical household?
The answer is: we
deflate the nominal wage.
Remember,
deflating is any procedure for canceling out the effect of average price on something.
So, for
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 Spring '08
 Mukherjee

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