Suppose you earned $50,000 last year, and inflation is at 5%. You receive a salary increase of $2,000. Explain your increase salary in nominal and real terms. Did you receive an increase?
NO
50000x5%
=2500
50000-2500=47500
To explain your increased salary in nominal and real terms, let's first define what these terms mean:
1. Nominal Salary: This refers to the actual dollar amount you receive without accounting for changes in purchasing power or inflation. In other words, it is the amount stated on your paycheck.
2. Real Salary: This is your nominal salary adjusted for inflation, which reflects the purchasing power of your salary. It takes into account the changes in prices of goods and services over time.
Now, let's calculate your nominal salary increase:
Nominal Salary Increase = Current Nominal Salary - Previous Nominal Salary
Nominal Salary Increase = ($50,000 + $2,000) - $50,000
Nominal Salary Increase = $2,000
According to the calculation, your nominal salary has increased by $2,000.
Next, let's calculate the real salary increase:
Real Salary Increase = Nominal Salary Increase - (Inflation Rate x Previous Nominal Salary)
Real Salary Increase = $2,000 - (0.05 x $50,000)
Real Salary Increase = $2,000 - $2,500
Real Salary Increase = -$500
According to the calculation, your real salary has decreased by $500. The negative value indicates that your increase in nominal salary did not keep up with inflation, resulting in a decrease in your purchasing power.
In conclusion, while you did receive an increase in your nominal salary by $2,000, the increase didn't fully compensate for the 5% inflation rate. Consequently, your real salary decreased by $500, indicating a decrease in purchasing power.