Suppose you had a choice between living in the United States

Suppose you had a choice between living in the United States in 1900 with an income of ?$1043000 per year or in the United States in 2012 with an income of ?$46000 per year. Assume the incomes for both years are measured in 2012 dollars.

In which year would you have the highest real? income?

In which year would you have the better standard of? living?

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Solution

Real income is highest in 2012, because in 1900, you have an income of $1043000 (measured in 2012 dollars) which can buy you less than that $1043000 worth of goods in 1900 (if measured in 1900 dollars, an income of $1043000 in 2012 dollars equals around $40,300 in 1900).That is, because of inflation, an income measured in 2012 dollars have less value and will buy you less worth of goods in 1900.

You\'ll have better standard of living in the year 2012, because you have an yearly income of $46000, but you have a $1043000 (or, $40300 if measured in 1900 dollars) income in the year of 1900, which will buy you less amount of goods in 1900 than you can buy in the year of 2012 with your $46,000 per year income. Considering the inflation, you\'re better off in 2012 with your $46000 yearly income.