SOC101

Nov.24/2010

Stratification II

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.

Illustration:

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

1 dollars

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 $100year 2 is $95.24year 1 (since ($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 $1,000year 3 in 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

## Document Summary

I nflation 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 . Year 2: a typical basket of goods & services costs . Therefore, the annual inflation rate = 5%; nominal year 2 dollars = real year. The real value of year 2 is . 24year 1 (since (/) * 100 = . 24). Real value = (dollars today/inflated base dollars today) * dollars today. The inflation rate between year 1 and year 2 is 3%. The inflation rate between year 2 and year 3 is 4%.