ECON 2000 Lecture Notes - Real Wages, Price Level, Gdp Deflator
18 Mar 2014
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Real variables: expressed in terms of goods and services. Real quantities: expressed in constant price, i. e. the price level for a reference period. Transforming a nominal variable into a real variable: Price level in 2011 was 110, price level in 2012 is 125. The price level is just the price of a single slice, slices are identical. Your real wage in 2011, therefore, reflects your purchasing power. Your purchasing power in 2012 has gone down. People in general are not comfortable with this analogy. Tell your parents that your purchasing power went down by half a slice of gdp in 2012! All they can see is that your wage has gone up from to. Transform nominal quantity into real quantity: transforming the nominal quantity in the past at today"s price: Tell them that goods and services are more expensive in 2012. The increase in your wage, , is not enough to keep up with that.
