Question

Rina and her employer both expected inflation to be 4% between 2012 and 2013, so they agreed, in a two-year contract, that she would earn $12.00 per hour in 2012 and $12.48 per hour in 2013. However, suppose inflation between 2012 and 2013 actually turned out to be 2%, not 4%. For example, suppose the price of sparkling water rose from $2.50 per gallon to $2.55 per gallon. This means that between 2012 and 2013, Rina's nominal wage ( ) by, ( ) % and her real wage ( ) by approximately ( ) .

Answer 1

Real wages can be calculated by this formula- Nominal wages ÷ price.

Nominal wage in 2012= $12/hour

Nominal wage in 2013= $12.48/hour

Price given to us in the form of water rose from- $2.50/ gallon to $2.55/ gallon

Calculating real wage for 2012 & 2013

2012-

Nominal wage ÷ Price

12 ÷ 2.50 = 4.8

2013-

Nominal wage ÷ price

12.48÷ 2.55 = 4.89

Difference in the Real wage-

(4.89 - 4.8) / 4.8 × 100

= 1.87%

Difference in the nominal wage-

(12.48 - 12) / 12 × 100 = 4%

Therefore, Rina's nominal wage increases by 4% and her real wage increases by 1.87%