Question

The prices of products and the wages paid to labor each change over time. Describe how prices and wages have changed over time. For your description of wage changes, include a description of how nominal and real wages change

Answer 1

The wage paid to workers and the price of the product is connected. If the firm increases the wages for the labor then the cost of producing the product also increases. As for cost increases, the price of the product increases in the market. This increased price leads to a decrease in the demand for the product. If the demand decreases then the labor required also goes down. This shows wages and prices are connected to the market.

Nominal wage is known as money wage, which is the money paid to labor. The real wage is an inflation-adjusted wage which is the real purchasing power of the labor.

Example: If employee receives $1000 as income and inflation rate in the market is 4%, then his real income will be nominal income ($1000) adjusted for inflation.