Example
Consider an example economy with the following wages over three years:
- Year 1: $20,000
- Year 2: $20,400
- Year 3: $20,808
Real Wage = W/P (W= wage, P= i, inflation, can also be subjugated as interest). Also assume that the inflation in this economy is 2% per year.
If the figures that are shown are real wages, then it can be determined that wages have increased by 2% after inflation has been taken into account. In effect, an individual making this wage actually has more money than the previous year. However, if the figures that are shown are nominal wages then the wages are not really increasing at all. In absolute dollar amounts, an individual is bringing home more money each year, but the increases in inflation actually zeroes out the increases in their salary. Given that inflation is increasing at the same pace as wages, an individual cannot actually afford to increase their consumption.
Read more about this topic: Real Wage
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