In 1991,the base year,you were earning $350/week.Your wages rose to $450 in 2000,the current year,when the Consumer Price Index stood at 135.What statement can you make about what happened to your real wages over this period?

Question

Quizplus · Accepted Answer

Real wages adjust for inflation, allowing you to buy the same amount of goods and services over time despite nominal wage increases. To calculate the change in real wages, adjust the nominal wage in the current year by the change in the price level (using the Consumer Price Index, CPI). In 1991, the base year, the CPI is implicitly 100, and your wage was $350. In 2000, with a CPI of 135, your wage rose to $450. Adjust the 2000 wage to 1991 dollars by dividing by the CPI increase (135/100 = 1.35) to get $450 / 1.35 = $333.33. Comparing $333.33 to the original $350 shows your real wages actually fell, because you would be able to buy less in 2000 with $450 than you could in 1991 with $350, after adjusting for inflation.

In 1991,the Base Year,you Were Earning $350/week