Principles of Macroeconomics / Unit 6 MAC 0513 worked example, 60 to 90 seconds
Converting a Nominal Wage
The idea
To compare amounts from different years, divide each nominal amount by that year's price index, then compare. If the index is stated around one hundred, divide the index by a hundred first. The result is expressed in the base year's money, so both figures are then in the same units and the comparison is meaningful. Doing this the other way round, comparing the nominal figures directly, measures the change in prices as well as the change in the amount.
In practice
Worked example: a wage of twenty thousand when the index was one hundred, and thirty thousand when the index was one hundred and eighty. The first is twenty thousand in base-year money. The second is thirty thousand divided by one point eight, which is about sixteen thousand seven hundred. The nominal wage rose by half; the real wage fell by about a sixth.
Where people slip
The same method converts any nominal amount: a pension, a price, a debt, a budget. And it is why a headline saying earnings reached a record tells you nothing until the figure is deflated.
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