Suppose your nominal wage fell and deflation occurred. Did your real wage increase or decrease?

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Suppose your nominal wage fell and deflation occurred. Did your real wage increase or decrease?

business economics

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Answer 1

Answer #1

Deflation refers to a general lowering of prices in the economy , so price level in economy is less.

Nominal wage is the actual wage a worker gets.

Real wages show the value of wages adjusted for inflation. Real wages are a guide to how living standards have changed.

Real wages = nominal wages / price level.

Now if nominal wage decreases and price level decreases as same proportion say 5% both

Then there no net change in real wages of the worker.

If nominal wages decrease < price level decrease then real wages will increase

For eg nominal wage decrease by 5% and price level by 3% then real wages increases by 2%

If nominal wage decrease is less then decrease inprice level due to deflation then real wages decreases

For eg 2% decrease in nominal wages and 5% decrease in price level then real wages decreases by 3% which is favourable for the worker as his purchasing power increased .

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Answer 2

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Suppose your nominal wage fell and deflation occurred. Did your real wage increase or decrease?

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