Deflating Index Numbers 🎈
Deflation means adjusting a value (like Wages or Income) for the effect of inflation to find its "Real" value.
Calculating Real Wages 💵
If your salary doubles, but prices also double, are you richer? No. Your purchasing power is the same. Deflating helps us answer this.
Formula
Real Wages = (Money Wages / Price Index_CPI) * 100
Real Income = (Money Income / Cost of Living Index) * 100
Purchasing Power of Money 📉
As the Price Index rises, the value of money falls.
Purchasing Power = (1 / Price Index) * 100
- Example: If Price Index = 200, Purchasing Power =
1/200 * 100 = 0.50. - Meaning: Your currency is now worth only 50 paise compared to base year.
Example Calculation 📝
Data:
| Year | Money Wages (₹) | Price Index (CPI) |
|---|---|---|
| 2020 | 10,000 | 100 |
| 2024 | 15,000 | 200 |
Task: Are workers better off in 2024?
Step 1: Calculate Real Wages
- 2020:
(10000 / 100) * 100 = 10,000 - 2024:
(15000 / 200) * 100 = 7,500
Conclusion: Though Money Wages increased from 10k to 15k, the Real Wages dropped from 10k to 7.5k. The workers are worse off.
Summary
- Money Wages: What you receive in cash.
- Real Wages: What you can actually buy with that cash.
- Deflating: The process of removing the inflation air balloon to see the real size.
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