what does it mean when real wage is decreasing?

Expert Solution

Let's assume that a person earns $12 as wages with which he can buy burger which costs $4 so he can buy 12/4 = 3 burgers with the given wages.

Now, lets assume that the wages increases to $14 whereas the price of the burger increases to $5 so now, he can buy 14/5 = 2.8 burger.

So, in nominal terms, the wages increase by 14-12 = $2 whereas his real wage decreases as his purchasing power decreases because earlier he could buy 3 units of burger whereas now, he can only buy 2.8 units of burger.

Rahul Sunny answered 1 year ago

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