**Nominal vs. Real (wages, income)**

To understand

**Nominal and Real**we must first understand the concepts of**Inflation and Purchasing Power**

**Inflation**is an increase in the

**average**price level of goods and services in a nation over time.

(If the price of apples is increasing, and the reason is because of a flood or a drought, then this is not spoken of as inflation as the cause is specifically from a flood/draught) If the price of all goods in the country are rising then we have

**Inflation**. (Often caused by increases in the supply of a country's currency)

**P**

**urchasing Power**is the number of goods or services that can be purchased with a unit of currency.

**Nominal wages**= current wages

**Nominal wages (Income)**is the amount of money I am paid at a certain period of time. If I'm paid $12 an hour, then my

**nominal wage**is $12 dollars and hour. A

**nominal wage**is expressed in the country's currency. If apples cost $1 each, then I have the ability (

**purchasing power**) to buy 12 apples.

Time Passes, (let's say a year) and

**Inflation**occurs, Apples have risen in prices to $2 each.
I'm in the US and my wage is $12 an hour, that is my

**nominal wage (income)**, and the**purchasing power**of my nominal wage is 6 apples at a cost of $2 each. Due to**inflation**my hourly wage of $12 has been reduced. I use to be able to purchase 12 apples for an hour's work but now I can only buy 6. My**purchasing power**has been reduced by 50%.**Real Wage**= (purchasing power of wages, what it will buy, nominal wages adjusted for inflation)

- If your income stays the same and
**inflation**(price level rises) occurs, then your**real wage**has decreases. - If your income stays the same and instead of
**inflation**there is**deflation**(price level falls), then your real wage has increased. - If your income stays the same and there is no
**inflation**, then your**real wage**is your**nominal wage**

**Nominal Wages = Real Wages**(if there is no inflation = 0%)

If your wage (income) is $12 an hour, and there is no inflation (price level=no change) then $12 is your real wage.

**Real Wages = Nominal Wages - Inflation**

If your nominal wage is $12 an hour and inflation is 50% then your real wage would be equal to $6 an hour. A 50% increase in inflation will cause ones real wage to be 50% lower than the nominal wage.

So, lets look at this 2010 problem. If the workers nominal wage increased from $10 to $12 then the wage increased by 20%. Yet, at the same time inflation (price level) increased by 10%.

So, wages increased by 20% and inflation increased by 10%.

So, lets look at this 2010 problem. If the workers nominal wage increased from $10 to $12 then the wage increased by 20%. Yet, at the same time inflation (price level) increased by 10%.

So, wages increased by 20% and inflation increased by 10%.

**IF you gain 20% and inflation (eats) ten of that 20%, you are left with 10%, the answer is C.**

**Nominal Wages = Real Wages (Inflation = 0%)**

**$10 = $10**

**Real Wages = Nominal Wages - Inflation**

**$9 = $10 - $1 (Inflation increased by 10%, this equals $1 of a $10 wage)**

**Real Wages = Nominal Wages - Inflation**

**$8 = $10 - $2 (Inflation increased by 20%, this equals $2 of a $10 wage)**

**Real Income video - mjmfoodie**