Question

In: Economics

The CPI is 110 on January 1, 2018, and 114 on January 1, 2019. John’s nominal...

The CPI is 110 on January 1, 2018, and 114 on January 1, 2019. John’s nominal wage is $1,000 per month on January 1, 2018, and $1,100 per month on January 1, 2019.

  1. What is John's real wage on January 1, 2018?
  2. Use the CPI to calculate the inflation rate in 2018.
  3. What is the percentage increase in John's nominal wage from 2018 to 2019?
  4. Using the arithmetic trick, what is the approximate percentage change in John’s real wage?
  5. According to the change in John’s real wage, is he better off or worse off?

Solutions

Expert Solution

a. The real wage of Jhon on January 1, 2018 will be equal to

= nominal wage on January 1,2018/CPI × 100

= $1,000/110 × 100

= $9.09 × 100

= $909.09

So the real wage of Jhon on January 1, 2018 is equal to $909.09

(b) The inflation rate in 2018 will be equal to,

Inflation rate = (CPI in 2018 - 100)/100

Inflation rate = (110 - 100)/100

Inflation rate = 10/100

Inflation rate = 0.1 or 10%

So the inflation rate in 2018 is equal to 10% or 0.1

(c) The percentage increase in Jhon's nominal wage from 2018 to 2019 will be equal to,

= (nominal wage in 2019 - nominal wage in 2018)/nominal wage in 2018

= ($1,100 - $1,000)/$1,000

= $100/$1,000

= 0.1 or 10%

So the percentage increase in Jhon's nominal wage is equal to 10%.

(d) Let's calculate the growth rate of inflation from 2018 to 2019,

= (CPI in 2019 - CPI in 2018)/CPI in 2018

= (114 - 110)/110

= 4/110

= 0.0363 or 3.63%

So the rate of inflation from 2018 to 2019 is 3.63% and the growth rate of nominal income is 10%. So the approximate percentage change in Jhon's real income is equal to,

= percentage change in nominal income - percentage change in inflation

Please note this is just an approximation not accurate, but it will serve the purpose of ours to know whether the change in real wage is positive or negative.

= 10% - 3.63%

= 6.37%.

So the approximate increase in the jhon's real wage is equal to 6.37%.

(e) So as you can see the change in jhon's real wage is positive so the real wage of Jhon will be higher in 2019 so we can say that he is better off in 2019 due to increased real wage.

Rahul Sunny answered 2 years ago
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