Chapter 1, Problem 1DTM

Real Income. Joshua Vermier of Sacramento, California, received a raise after his first year on the job to $45,800 from his initial salary of $44,000. What was Joshua’s raise stated as a percentage? If inflation averaged 2.8 percent for the year, what was his real income after the raise? What was his real raise stated as a percentage?

Summary Introduction

To Calculate: Percentage of rise and his real income if inflation is 2.8%.

Concept Introduction: Real income is an income in which amount of inflation is already adjusted. It is calculated by dividing the nominal income from the change in price level. It measures the amount of goods and services purchased out of income.

Explanation of Solution

Given Information: The Salary of employee is $ 44,000 at starting of year one and $ 45,800 at the end of year one.

Percentage raise in income= $\frac{\text{Current income}-\text{Previous income}}{\text{Previous income}}\times 100$

   = $\frac{45800-44000}{44000}\times 100$

  = 4.09%

If inflation is 2.8% then real is income is as follows:

Real income= $\text{Current income}\times \frac{\text{100}}{100+\text{inflation rate}}$

   = $45800\times \frac{100}{100+2.8}$

   = $44,552.53

Real raise in income = $\frac{\text{Real income}-\text{Previous income}}{\text{Previous income}}\times 100$

   = $\frac{44553-44000}{44000}\times 100$

   = 1.26%