NGPF Econ Collection

Budgeting

ECON: Inflation, Spending, and Wages

Since it would be quite hard to live our daily lives without buying anything, inflation is something
we all have to deal with. In this activity you will discuss what inflation is, compare today’s
purchasing power of the U.S. dollar to previous decades, and learn how inflation relates to the
wages your job pays you.

Part I: How Inflation Works

Watch this video to learn more about inflation. Then, answer the questions.

1. In your own words, briefly describe how inflation works.

Inflation is the decrease in purchasing power of a currency, or the rise of overall prices

2. Gerald just received a 2% raise from his employer. However, the rate of inflation last year was
3%. Explain why this is a problem for Gerald.
Because gerald is making less than the rate of inflation that means that his purchasing
power will decrease and that he is worse off than he was lat year even though he received
a raise.

Part II: How Much Would $1 Be Worth Today?

3. Because of inflation, something that cost $1 in the past

would cost more if we bought it today. Use this inflation
calculator to find out how much a $1.00 purchase in
previous decades would cost you today.

(Enter “1” in the dollar field and change the year for each
decade as pictured to the right. Leave all other fields as
they are. Then input the results in the table below.)

One Dollar Purchase: Then and Now

A $1.00 purchase
1950 1960 1970 1980 1990 2000 2010 2020
in...

Would cost this

$12.61 $10.11 $7.84 $3.81 $2.33 $1.76 $1.37 $1.15
much today

4. source
This study Listwas
something that you can
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 item would have cost about $2.00 around 1950-1960?
The KFC $20 Family fill up is something I can purchase today for 20$. I don’t feel too bad
about not having a KFC 2$ family fillup though because i get paid 13$ an hour today
instead of .69 cents an hour like in the 60’s

5. The item you listed would have cost $2.00 back then? What a deal! Does this mean that
item would have been super cheap and affordable for most people in 1950? Why or why
not?
No. It probably wouldn't be cheap or affordable for most people it probably would have
been about the same affordability as today because the people in the 50’s and 60’s made
like 69 cents an hour.

Part III: Nominal vs. Real Wages

Since inflation is continuously happening, that means a person’s income has to increase to avoid
losing purchasing power every year. Review the article Nominal Wage vs. Real Wage to learn more
about their importance. Then, answer the questions.

6. In your own words, explain the difference between nominal wage and real wage.
Real wage = your nominal wage when you incorporate the current inflation rate
Nominal wage = the literal amount of money you get without factoring in inflation

7. Vicky has worked for the same company since January 2011. Her starting salary was $52,000
and she has received a $1,000 raise on the first day of each year.
a. How much is her salary today?
12 x 1,000 = 12,000

b. If her salary had increased at the same rate as inflation, how much would she be
making today? (Tip: Use the inflation calculator)
$16,144.14 + 52,000 = 68,144.14

c. When comparing the rate of her salary increase to the rate of inflation, how would
this have an impact on Vicky’s budget?
Vicky’s budget would increase or decrease depending on inflation that year

d. Vicky has decided she either needs to find a second job so she can meet her current
spending and saving goals or she needs to have a discussion with her employer
about her salary. What would you recommend to Vicky as her best course of action
and why?
I recommend Vicky have a discussion with her employer about her salary because
she’s been working there for 0ver 10 years and has probably received a few
promotions and hopefully she's a valuable asset to the team and losing her would
be more important to the boss than giving her an adequate raise.
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