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real incomethe MONEY WAGE rate divided by the general PRICE LEVEL of products. Notationally, this is written W/P If wages and prices both rise by, say, 10% from an initial index number of, say, 100, the original ratio of W/P is 100/100 = 1, and the new ratio of 110/110 is also 1. An increase in real wages occurs when wages rise more quickly than prices or prices remain constant. In the latter instance, a rise in wages of 10% would give the ratio 110/100 = 1.1, thus making the wage earner 10% better off because he is capable of purchasing 10% more products with his new wage.
The analysis of real and money wages in relation to employment and output is a continuing central theme within economics although it is generally thought to be real wages that determines the level of employment rather than money wages. See CLASSICAL ECONOMICS, KEYNESIAN ECONOMICS, MONEY ILLUSION.