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Macroeconomics

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Nominal vs. Real Income: Adjusting Nominal Income with the CPI

MACRO-I2JOSZ

Consider the following table that contains hypothetical data on average student income on a college campus for the years 2012 – 2014.

Year Nominal Student Income ($\$$) CPI (base year = 2012) Real Student Income ($\$$)
2012 12,500 100
2013 12,800 101.5
2014 13,100 105.6
2015 13,800 112.1

$ $
In a recent news article, a reporter claimed that student incomes increased by a sizable amount between the years 2012 – 2015. Thus, the reporter insinuates, the living conditions for students has improved. Suppose you are a representative of the university’s student union and, because nobody else but you in the union successfully completed an economics course, are tasked with the challenge of discrediting the reporter’s statement.

Suppose you decided to write an article to address the incorrect claims of the reporter. The primary issue you would address is that

. For your article, you decide to adjust the reporter's figures using the Consumer Price Index (CPI) to obtain a series of real student income figures.


After you construct the new series of figures you state that over this period real student incomes have actually

by

percent and that students only experienced any increase in real incomes of

between 2012 and 2013. You conclude your article by saying, "although nominal incomes increased over this period, prices have also increased and have eroded students'

, resulting in lower living conditions.".