<p>Whenever we go from nominal to real terms, we need a base year.  As an example, let's use 2016 as the base year.  In the base year, the nominal wage $W$ is always equal to the real wage $w$ (this is true for any price or cost, not just wage).  Also, we always set the price level $P$ equal to 1 in the base year.  That's what makes it the base year.</p>

<p>Anyway, let's say that, in 2016, $w_{2016}=W_{2016}=15$.  Suppose that, between 2016 and 2017, there's 2% inflation - that is, the price level $P$ increases by 2% from $P_{2016}=1$ to $P_{2017}=1.02$.  Then, it follows that the real wage in 2017 will be $w_{2017}=\frac{W_{2016}}{P_{2017}}=\frac{15}{1.02}=14.706$.  I hope this example helped.</p>

<p>In case it didn't, you can think about it like this:  Dividing the nominal wage by the price level is just how you adjust for inflation, thus giving you the real wage.</p>

CC BY-SA 3.0
2016-08-05T04:09:24.127Z
Awesome! I figured that the price level actually might of meant a price index, not just some random number. Thanks so much for your help!
Romaion
CC BY-SA 3.0
2016-08-05T03:27:33.310Z
2016-08-05T03:27:33.310Z
ExpelledFromParadise
<p>I think it should be noted that any real price, in this case wage, is actually the price of something in units of a good. In this case, P the price level is the price of a typical consumed basket of goods. The real wage W/P is how much you are paid in &quot;baskets&quot;. Economists care about real prices because nominal prices are in units of money, which is just paper, but real prices tell you how many goods you can get. The idea is you don't care about the money, what you care about is the goods you can buy with the money.</p>
<p>For example, imagine the price of a pizza is \$10/pizza. And you earn \$20/hour. Then your real wage W/P = (\$20/hour)/(\$10/pizza) = 2 pizzas / hour. You get paid 2 pizzas an hour.</p>

CC BY-SA 4.0
2020-12-26T07:19:29.987Z
2020-12-26T07:19:29.987Z
Lesser_Daikon
<p>JIC people still read this,</p>

<p>When adding one additional worker,
ΔProfit=ΔRevenue-ΔCost
=(P*MPL)-W
&amp; since firms are going to produce where profit is maximised, which is where it is no longer profitable to hire any more workers, ΔRevenue=0</p>

<p>Hence, 0=P*MPL-W,
W/P=MPL. </p>

CC BY-SA 4.0
2020-03-11T00:41:32.387Z
2020-03-11T00:41:32.387Z
Mana
<p>Im reading about labour markets, and the notes mention that the real wage 'w' = W/P, where W = the nominal wage, and P = the price level. Could someone please use some 'W' and 'P' as an example to show me how real wages emerge from the ratio W/P? </p>

<p>Thanks!</p>

<macroeconomics><labor-economics>
Why does the real wage = W/P?
Romaion
# Why does the real wage = W/P?

(Asked by: username_0 on 2016-08-05)

Im reading about labour markets, and the notes mention that the real wage 'w' = W/P, where W = the nominal wage, and P = the price level. Could someone please use some 'W' and 'P' as an example to show me how real wages emerge from the ratio W/P?

Thanks!

**Tags:** macroeconomics, labor-economics


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## 3 answers

### Answer by username_1 on 2016-08-05. Score: 2 | Accepted answer

Whenever we go from nominal to real terms, we need a base year. As an example, let's use 2016 as the base year. In the base year, the nominal wage $W$ is always equal to the real wage $w$ (this is true for any price or cost, not just wage). Also, we always set the price level $P$ equal to 1 in the base year. That's what makes it the base year.

Anyway, let's say that, in 2016, $w\_{2016}=W\_{2016}=15$. Suppose that, between 2016 and 2017, there's 2% inflation - that is, the price level $P$ increases by 2% from $P\_{2016}=1$ to $P\_{2017}=1.02$. Then, it follows that the real wage in 2017 will be $w\_{2017}=\frac{W\_{2016}}{P\_{2017}}=\frac{15}{1.02}=14.706$. I hope this example helped.

In case it didn't, you can think about it like this: Dividing the nominal wage by the price level is just how you adjust for inflation, thus giving you the real wage.

> **Comments:**
> **username_0**: Awesome! I figured that the price level actually might of meant a price index, not just some random number. Thanks so much for your help!  

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### Answer by username_2 on 2020-12-26. Score: 1

I think it should be noted that any real price, in this case wage, is actually the price of something in units of a good. In this case, P the price level is the price of a typical consumed basket of goods. The real wage W/P is how much you are paid in "baskets". Economists care about real prices because nominal prices are in units of money, which is just paper, but real prices tell you how many goods you can get. The idea is you don't care about the money, what you care about is the goods you can buy with the money.

For example, imagine the price of a pizza is \$10/pizza. And you earn \$20/hour. Then your real wage W/P = (\$20/hour)/(\$10/pizza) = 2 pizzas / hour. You get paid 2 pizzas an hour.


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### Answer by username_3 on 2020-03-11. Score: 0

JIC people still read this,

When adding one additional worker,
ΔProfit=ΔRevenue-ΔCost
=(P\*MPL)-W
& since firms are going to produce where profit is maximised, which is where it is no longer profitable to hire any more workers, ΔRevenue=0

Hence, 0=P\*MPL-W,
W/P=MPL.


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