In 1982 to 1984, the base period used for the consumer price index, the average
ID: 1176959 • Letter: I
Question
In 1982 to 1984, the base period used for the consumer price index, the average earnings of construction workers were $442.74 per week. By 1989 the earnings of construction workers had reached $506.72 per week, but the consumer price index had risen to 124.0. What were construction workers%u2019 real earnings in 1989 stated in 1982%u20131984 dollars?
Make sure to explain what you find means. Just doing the calculations without the explanation will be considered an incomplete answer. TIP; this question is not as easy as it looks.
Again it is the interpretation and explanation of this question that will generate full points.
Explanation / Answer
real earnings = $506.72/1.24 = $408.64
Since the consumer price index has increased, the increase of the nominal earnings of the workers is affected by the increase in the price level. Increase in the price level indicates reduced purchasing power of the currency, therefore reduces its real value from 1982 to 1989. Dividing the nominal earnings by the factor by which the price level has increased results in the real earnings for the workers in 1989 stated iin 1982 dollars.