Question

Martha got a new contract with Petz clinic with a 3% pay raise, however, inflation rose by 4%. which made Martha sad. Why is Martha sad? After all, she dot a pay raise.

Answer 1

Martha is sad because although her salary has increased in nominal terms, what really matters is if the salat is increasing in real terms. If the salary si increasing in real terms, it reflects increasing purchasing power of the salary and vie versa. Real increase = nominal increase - inflation

= 3% - 4% = -1%

Thus, her salary is decreasing in real terms, that means that the price of goods is rising faster than the increase in her income and her purchasing power has actually fallen. She has every right to be sad.