If real wage is to be calculated when we have nominal wage a

If real wage is to be calculated when we have nominal wage and price deflator, how do we do that?

Solution

Nominal wage is the gross amount of wage during a period without adjusting inflation or deflation.

Real wage is the net amount of wage after adjusting inflation or deflation.

Formula:

Real wage = Nominal wage – Inflation

Or

Real wage = Nominal wage + Deflation

Price deflator is the division of nominal wage by real wage.

Price deflator = Nominal wage / Real wage

If the figures of nominal wage and price deflator are given, the real wage could be calculated by placing those figures in the above “price deflator” equation.

Example:

Suppose nominal wage is $5,000 and price deflator is 1.25, then the real wage is,

Price deflator = Nominal wage / Real wage

1.25 = $5,000 / Real wage

By rearranging,

Real wage = $5,000 / 1.25

                 = $4,000

Therefore, the real wage would be $4,000.