Question

If you earned $10-an-hour in 2005 when the cpi was 100, and you earn $11-an-hour today when the cpi is 120, then your real wage rate has _____ since 2005.

Answer 1

The consumer price index, or cpi, has the following formula:

$CPI = \frac{Current \ Period \ Price}{Base \ Period \ Price} \ x \ 100$

Let's compute the real base period price for the cpi today.

$120 = \frac{11}{Base \ Period \ Price} \ x \ 100$

Base Period Price = $9.2

Then, we compare the apparent with the real:

Real Base Period:  $11 - $9.2 = $1.8
Apparent Base Period: $11 - $10 = $1

Real > Apparent, thus your real wage rate has increased since 2005.