# SOC101Y1 Lecture Notes - Tropical Year, Tax Rate

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Published on 31 Jul 2011
School
Department
Course
Professor
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 isnt?)
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)
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## 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%.