Inflation and Real Dollars:
Inflation is the increase over time in the cost of a standard basket of goods & services.
Real dollars are nominal dollars minus inflation (so cost in real dollars is the cost of a
standard basket of goods & services minus inflation, & income in real dollars is nominal
income minus inflation, or purchasing power).
Market income is income before taxes & transfers.
Year 1: a typical basket of goods & services costs $100.
Year 2: a typical basket of goods & services costs $105.
Therefore, the annual inflation rate = 5%; $105 nominal year 2 dollars = $100 real year
How much is $100 year 2 dollars worth in real 1-year dollars (i.e., what is the real value
of year 2 dollars using year 1 as a base)?
The real value of $100 year 2 $95.24 year 1ince ($100/$105) * 100 = $95.24).
Real value = (dollars today/inflated base dollars today) * dollars today.
Ex. The inflation rate between year 1 and year 2 is 3%. The inflation rate
between year 2 and year 3 is 4%. What are $1,000 year 3n year 1 dollars?
$1000 + 3% = $1030
$1030 + 4% = $1071.20
$1000/$1071.20*1000 = $933.53
More women working now, and increased productivity
All averages mask-underlying distributions – increase in wealth for example, could go to
wealthy families (who is getting this increase, & who isn’t?)
Difference between Income & Wealth
Income: what you earn in a given period of time
Wealth: total worth of assets (i.e. house, total $ in bank account)
Differences in wealth are increasing faster than income differences
Government collects taxes & redistributes incomes (i.e. old age pensions)
www.notesolution.com 1. Substantial income inequality differences exists in Canada
2. Wealth inequality is growing faster than income inequality
How Tax Laws Reinforce Inequality
Half of Canadian taxes are progressive (based on the ability of the taxpayer to
pay) & half are regressive, so only modest redistribution of income taxes take place.
There is no inheritance tax so the wealthy can pass advantages from generation
Different income sources are taxed at different rates, with the income sources of
the wealthy taxed at lower rates.
Many tax benefits are more advantageous to the wealthy.
Progressive taxes are not based on ability to pay.
Different sources of income are taxed at diff