Question

Emma, a monthly salaried worker, received 1,300 cedis as her net salary; she heard that this year’s
inflation is at 18%. This situation caused prices to soar so high that she complained about
everything she buys. In the previous year she was able to buy herself, dresses, a basket of
foodstuffs, a small bag of oranges, a dozen of drinks and her transportation. However, this year,
she couldn’t afford the full bag of oranges but half, and only 6 drinks after the other expenses.

1. From above, what is Emma’s nominal income?

2. What is her real income?


3. What is the difference between her real incomes for this year and last year?

4. How much does Eyram need now to be able to have all the things she used to have
previously?

Answer 1

 

1) Emma's nominal income: income before inflation effect

= 1,300 cedis is the nominal income

2) Emma's real income: Income after inflation effect

= present value of 1,300 cedis after 18% inflation rate is

= 1300 / (1+18%)

= 1,101.69

3)Difference in real income for this year & last year:

= can be calculated as the difference in real income between this year and last year

= 1,300 - 1,101.69

= 198.31

4) Amount required by emma to be able to have things like previously:

Last year's price of goods subjected with the inflation rate gives the extra amount she needs to earn to cover up that inflation effect she now faces in this year

= 1,300 cedis x 1.18

= 1,534 cedis

i.e extra 234 cedis (1534 -1300) has to be earned by her to be able to gave things like previously.