Question

Your father’s annual nominal salary back in 2000 the base year, was USD 50,000 and in 2020, his nominal salary is USD 90,000. In 2020, the current cost of the basket of goods and services is USD 30,000, while in the base year, it was USD 25,000. a. Enter the value by which your father’s real wage changed from 2000 to 2020. b. Based on your answer in (a), has your father’s standard of living increased, decreased, or remain the same? Explain why in no more than 3 sentences.

Answer 1

Solution:

Real wage = nominal amount/price index

Price index = (cost of market basket in particular year/cost of market basket in base year)*100

Then, PI for base year = 100, for year 2020, PI = (30000/25000)*100 = 120

So, real wage in 2000 = 50000/100 = 500, in 2020 = 90000/120 = 750

a) Father's real wage changed from 2000 to 2020 by 750 - 500 = 250

Percentage change = (250/500)*100 = 50%

b) As the real wage has increased, we can also say that my father's standard of living has increased as well. As real wage has increased, it indicates that the purchasing power has increased as well. With a higher purchasing power, naturally a person has capability for a higher standard of living.