What is the difference between Real Wage and Nominal Wage?

Real wages are the type of wages that consider inflation rates. The wages will reveal the purchasing power that a person holds and the amount of goods or services the person can acquire, given the current market conditions.

It can be identified as the actual amount the employee can purchase with the payments provided after inflation has been determined. Real wages can be a guide to signify the changes in living standards.

Nominal wages are the payments provided to workers in money form, and it does not take into account the inflation rates or any other market conditions. Unlike real wages, nominal wages do not have a calculation or formula. What establishes the nominal wage, instead, are the government policies and the organization’s compensation policy within its capacity.

The study of wages is important to economists for various reasons. It can help calculate the average that people make for certain positions, as well as identify any gaps in wages. There are two types of wages that economists study. Nominal wages are the standard when it comes to measuring wages. This is the amount that a person gets through their paycheck and is the amount of income they list on their taxes. A real wage is used to understand the worth of money as time passes by. For example, cars from 20 years ago are cheaper than cars are today.