Start typing, then use the up and down arrows to select an option from the list. # Macroeconomics

Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Unemployment and Inflation

# Nominal Income and Real Income

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Nominal Income and Real Income 3m
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Nominal Income and Real Income 3m
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Alright let's try this example DJ. Money faces the world's best DJ in 2017. He earned \$20,000 playing the most popular music at nightclubs. He spent many nights practicing twisting knobs and holding one earphone 11 of the headphones to his ear audiences were so thrilled by his itunes playlist that in 2018 he was able to earn \$25,000 selecting the most popular music. Use the following information regarding C. P. I. To answer these questions. So we're gonna go through a together, we're gonna calculate D. J. Money faces real income in 2017 and we'll take a pause. I want you guys to try and calculate the 2018 income and also use that percentage change formula to calculate the percentage change in his real income. Alright so let's go ahead. We're gonna start here with a together and then you guys can try the other ones. So let's start with a his 2017 real income. So remember when we're calculating real income we just want to take the nominal and we're gonna divide it by the price index, the C. P. I. And we're gonna do it in hundreds right in hundreds. So as a decimal. So let's go ahead and do this here. So what was his nominal income in 2017? We have it right up here in 2017. He earned \$20,000. So his the numerator here is gonna be 20,000 and we'll divide it by the C. P. I. In what year we're gonna use the C. P. I. From 2017 right in 2017. the C. P. I. Was 118. So we got to convert that to a decimal. So 1 18 that's like 100 and 18% of the base year prices. So it's gone up by 18%. So we're going to convert it to 1.18. We move the decimal over two times and now we've got um a decimal instead of a percent. So we're gonna divide by 1.18 here And we'll do the equal sign right down here. So in 2017 what is his real income? So let's see what that is. Come on calculator. Don't feel me now. Alright 20,000 divided by 1.18. It gives us a real income of 16,000 \$949.15. Okay \$16,949.15. That is his real income in 2017. So what does that mean? What does it mean that that's his real income? That means if we compared it to the base year in 2005 notice 2005 is our base year here. They didn't tell us but we can we can gauge that it's the base year because it's 100 in 2005. Um So the price level was uh what we're saying is that if this money was earned in 2005 it was worth \$16,949.15. So what he earned the 20,000. This is a better explanation. The 20,000 that he earned in 2017 Would have been the equivalent of earning \$16,949 in 2005. Okay, so basically the same purchasing power, right? He's able to purchase the same amount of goods because inflation has taken place since 2005. Alright, let's take a pause here, and you guys try to solve the real income in 2018, and then we'll do another video for the final one. question seat. Cool.
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Nominal Income and Real Income 1m
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Alright, let's see how you guys did with the 2018 real income. So in 2018 his real income, we're gonna take his nominal income in 2018, which was 2018. He was able to earn \$25,000 and we'll divide that by the C. P. I. And which C. P. I. Are we gonna use The 2018 c. P. I. Right 2018. And that was 1.20. So 1.20 is our denominator here. Let's go ahead and calculate 25,000 Divided by 1.20. It's gonna give us a nominal or real income. Excuse me, real income of 20,000 8 33 and 33 cents. Okay, so now what we're talking about is if we had in in 2018 he earned \$20,833.33 in 2005 money. Right? It has the same purchasing power as in the base year, \$20,833 of purchasing power. Cool. Alright. Let's pause here and then let's try question. See in the next video
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Nominal Income and Real Income 4m
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