real wage formula

Learn more at http://www.doceri.com Let’s look at the following wage rate example. Wage Rate Example. How much can you buy with your hard earned wages? Real (inflation-adjusted) wages at the 90th percentile increased over 1979 to 2019 for the workforce as a whole and across sex, race, and Hispanic ethnicity. Savvy individuals and most businesses keep a close watch on the economic inflation rate, using it as a basis for investment in risk-free vehicles. Understand your real hourly wage. Therefore, real wages are the purchasing power of nominal wages. w/p. Negative inflation or deflation will lead to a higher purchasing power of real income. Benefit #3: Once you've used the Real Hourly Wage Calculator for calculating your RHW you should discover that you can increase your RHW simply by trimming the costs associated to your work. 22.3 NOMINAL AND REAL VALUES Indexation is a method of linking the price or value of an asset to a price or price index of some type to adjust for inflation. Let’s look at the following wage rate example. Multiplied By C. Plus D. Divided By 0.1 Points QUESTION 20 Income Divided By The Price Level Is _____ Income. The consumer price index for 2010, was 218.056 and in 2011 was 224.939. Many nations require a minimum amount of income per worker. A consumer with a $60,000 annual nominal salary would have lost approximately $595 of purchasing power over a year, or one cent per dollar spent, due to the effects of inflation. Your real wage, on the other hand, takes inflation into account. There are a few ways to calculate real income. FIGURE 3 Now, suppose impovements in our education system make labor of all kinds more productive. Cost of living indexes can also provide valuable information on real wage vs. nominal wage rate expectations. The real wage rate is the quantity of goods and services that an hour’s work can buy. Now, let's see how much purchasing power you lost: Your real wage has fallen by 1.1% from 2010 to 2011. | 1 You may be paid $15 an hour, but your real hourly wage is less than that. Company Beta has currently 3 workers and the units produced by them is 101. Real and nominal wages are types of compensations done based on labor or services provided. A. So just have to replace the vaiables and find the price level using the gdp deflactor informacion. After tax wages is the gross annual wage less the total of federal income tax, state income tax, and social security/FICA tax. Get the unbiased info you need to find the right school. 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Services. Possibly much less. After tax wages is the gross annual wage less the total of federal income tax, state income tax, and social security/FICA tax. Real income is an economic measure that provides an estimation of an individual’s actual purchasing power in the open market after accounting for inflation. Real Wage. The following is the formula for determining real wages: W= (NW/P) * 100 Minus B. To maximize profit, the firm hires up to the point at which. The theory is essentially one of real wage adjustment, whereas the regression describes nominal wages. All rights reserved. Your real wage is your nominal wage adjusted for inflation. FIGURE 3 Now, suppose impovements in our education system make labor of all kinds more productive. Enrolling in a course lets you earn progress by passing quizzes and exams. If inflation is 3 percent and wages increase by 2 percent, the real wage will be -1 percent. Get access risk-free for 30 days, This includes building costs, property taxes, utilities, payroll taxes, benefits, insurance, supplies, and equipment costs. MPL = real wage. If we plug this value of the real wage back into either the supply or the demand equation, we find that the equilibrium quantity of hours worked is 40,000 hours. In this case, purchasing power will drop despite real wage growth. You can use this formula, along with the CPI, to calculate real wages: Real Wage = (Old Wage * New CPI) / Old CPI. The real wage formula is: w=W/P being w: real wage; W: nominal wage and P: price level. For example, assume a consumer spends approximately $100 per month for a total of $1,200 per year on food during a year when inflation is rising at an annual rate of 1%. The average level of real wages will be higher. For example, a mid-level manager with a nominal $60,000 per year salary might follow the CPI to calculate his real hourly, weekly, monthly, and annual wage rate. the payment to labor measured in units of output. Therefore, in Figure 3 below, point E, the long-run equilibrium, has a real wage of w(E) and employment of L(E). The Bureau of Labor Statistics (BLS) releases a monthly real earnings report which can be helpful in following real wage rates. The offers that appear in this table are from partnerships from which Investopedia receives compensation. In order to figure out how "rich" a person is, we have to compare their wage to the amount that wage can buy. Here's how to calculate the GDP growth rate. Wage growth (real wage growth) is a rise of wage adjusted for inflations, often expressed in percentage. However, analysts of real income can choose any price index measure that they believe best fits their income analysis situation. Many individuals and businesses invest a significant portion of their income in risk-free investment products and vehicles that match or exceed the economic inflation rate in order to mitigate the effects of inflation on their income. Hank is a worker at a major oil company. The PCE Price Index is used by the Federal Reserve for gauging consumer price inflation and making monetary policy decisions. If you are paid by the hour, you are paid a nominal wage, which is simply the amount of money that you earn per hour of labor. Employed full time: Median usual weekly real earnings: Wage and salary workers: 16 years and over: Hispanic or Latino: Men 1982-84 CPI Adjusted Dollars, Not … 193 lessons The PCE Price Index. In this case, the amount of Rs. In this lesson, you'll learn about real wages and how to calculate them. You needed to make $18.57 to keep the same level of purchasing power you had in 2010 making $18.00 per hour. Let's say we have a friend named Joe and that he's a plumber. After taxes, how much of your income do you take home? REAL WAGE CALCULATOR. For wage rate, us government calls this the “minimum wage”. The 1% have not increased production or created jobs in the face of declining real incomes, so it is time to shift some resources back to the source of wealth. After taxes, how much of your income do you take home? Anyone can earn The PCE Price Index is a second comparable consumer price index. Nominal wages - inflation = real wages. For wage rate, us government calls this the “minimum wage”. This is why real income decreases when inflation increases and vice versa. An increase in money wage rate implies an increase in real wage rate and a cut in money wage rate amounts to a cut in real wage rate. It's important to distinguish between nominal wages and real wages. Solution Use the following data for the calculation of the MPL. For example, a real wage of $1,000 per month in a small town may provide a more comfortable life and allow employees to get more for their money than a similar amount in a big city. US Real Average Hourly Earnings is at a current level of 11.34, up from 11.33 last month and up from 10.99 one year ago. Real wages rose at the top of the distribution, whereas wages rose at lower rates or fell at the middle and bottom. This video screencast was created with Doceri on an iPad. Example of Real Interest Rate. Sciences, Culinary Arts and Personal This formula gives a direct and a better picture of the two interest rates and their relationship. The formula for real GDP is nominal GDP divided by the deflator: R = N/D. Once you are finished, you should be able to: To unlock this lesson you must be a Study.com Member. These indexes are used to make cost of living adjustments (COLA) for workers, insurance plans, retirement plans, and more. The economic contribution of a sports franchise to a community is roughly on the same order of magnitude as a: a. a new McDonalds on a city street b. new automobile factory c. new Super Walmart. When prices are rising in the marketplace but consumers are getting paid the same wage then a discrepancy is created which leads to an effect on purchasing power. - Identifying an Economy That is Below Potential, The Taylor Rule in Economics: Definition, Formula & Example, Sticky Prices: Definition, Theory & Model, Aggregate Supply Curve: Definition & Overview, Investment Spending: Definition & Formula, Money Demand and Interest Rates: Economics of Demand, What is an Expansionary Gap? Between 1981 and 2011, the nominal wage rate more than doubled, but the real wage rate stayed roughly constant because the increase in the nominal wage rate just kept up with inflation. The formula below calculates the real value of past dollars in more recent dollars: Past dollars in terms of recent dollars = Dollar amount × Ending-period CPI ÷ Beginning-period CPI. He has performed as Teacher's Assistant and Assistant Lecturer in University. In this case, purchasing power will drop despite real wage growth. By what percentage would your real income, 1. Wage growth (real wage growth) is a rise of wage adjusted for inflations, often expressed in percentage. Before answering the email, you remember your Economics lesson on Real Wages, and you quickly look up the following data regarding the Consumer Price Index, Real Wage = (Old Wage * New CPI) / Old CPI. Sticking with that $31,200, we can now use the labor cost formula to determine the amount of annual overhead costs an employer pays in addition to that employee’s hourly wage. Economists calculate this change in the value of money using the Consumer Price Index, or CPI, which grants extra weight to the changing prices of the economy's more significant items. 2. Other takes on the real wage rate might look at the percentage of real to nominal wages or the real vs. nominal wage growth rate. Real Wages; Figure Your Hourly Wage After Work Expenses. What is the formula for real wages? Study.com has thousands of articles about every It's important for you to know your real wage to determine if an increase in your wage is actually increasing your wealth, simply keeping pace with rising costs, or worse, falling behind rising prices. Assume the inflation rate last year was 5.1 percent. Real income is how much money an individual or entity makes after accounting for inflation. Based on the above information you are required to calculate the Marginal Product of labor. For example, real GDP was $19.073 trillion in 2019. can someone help? On the other hand, if real wages rise more slowly than inflation, then your real wages - your purchasing power - has declined. flashcard set{{course.flashcardSetCoun > 1 ? Calculate Your Real Hourly Wage If you add in all the extra hours it takes to prepare for your job, commute to your job, relax after your job, and all the job associated costs (commuting, more expensive lunches, dry cleaning, "decompressing"), your real hourly wage is a lot lower than you think. The nominal GDP was $21.427 trillion. how to calculate real wage formula. If you are converting hourly, daily, weekly, or biweekly pay to monthly pay, why is it necessary to first calculate the annual pay? Rising prices eat away at the value of your pay, and raises aren't always worth as much as you may think. real wage = 4. The GDP Price Index is one of the broadest measures of inflation since it considers everything produced by the U.S. economy. Most real income calculations are based on inflation reported by the Consumer Price Index. Then divide both sides by 18,000 to obtain. The real wage of cheese workers in terms of cheese is the quantity of cheese that a cheese worker (or cheeser) can buy with a unit of work. Mean Real Wages Adjusted by Cost of Living for Los Angeles County, CA . At the end of 2018, the CPI reported an inflation rate of 2.4%. The Multiplier Effect in Economics: Definition, Formula & Example, Quiz & Worksheet - Calculating the Real Wage, Over 83,000 lessons in all major subjects, {{courseNav.course.mDynamicIntFields.lessonCount}}, Consumer Price Index: Measuring the Cost of Living and Inflation, The GDP Deflator and Consumer Price Index, Gross Domestic Product: Nominal vs. Real GDP, Gross Domestic Product: How to Calculate Real GDP, The Multiplier Effect and the Simple Spending Multiplier: Definition and Examples, Cost-Push Inflation: How the Supply Side of the Economy Leads to Inflation, Demand-Pull Inflation vs Cost-Push Inflation, Effects of Inflation on Suppliers and Demanders, Introduction to Macroeconomics: Help and Review, Biological and Biomedical lessons in math, English, science, history, and more. Dunno of what year is the real wage based on year 2003. For example, you may earn $30,000 per year but, when you deduct your taxes, … Two basic real income or real wage formulas include the following: Wages - (Wages x Inflation Rate) = Real Income Wages / (1 + Inflation Rate) = Real Income I can understand that real wage will equal MPL(marginal product of labor) when MPL is diminishing, because firms will employ more labor until MPL falls to real wage. Hank is a worker at a major oil company. The formula below calculates the real value of past dollars in more recent dollars: Past dollars in terms of recent dollars = Dollar amount × Ending-period CPI ÷ Beginning-period CPI. What is the Difference Between Blended Learning & Distance Learning? The nominal wage rate is the average hourly wage rate measured in current dollars and the real wage rate is the average hourly wage rate measured in dollars of a given reference base year. According to the report, real hourly wages, meaning hourly wages after adjusting for inflation, increased from approximately $20.70 in 1981, to $23.70 in 2011, a $3 wage gain in 30 years. The Real Hourly Wage Calculator will help you to do that as well. Adjusting that by the CPI’s monthly change of -0.01% in December 2018, the $5,000 would have increased its purchasing power to $5,005. Real wages are determined by the inflation rate and take into consideration the purchasing power of the amount paid as compensation. In July 2010, nominal wages are growing by 2.2%, but we were experiencing CPI inflation of 3.7%; Therefore real wages are effectively falling by 1.5%; Consumers are able to buy a smaller selection of goods and services, therefore, there is likely to a squeeze in spending … Real Interest Rate Formula (Table of Contents) Formula; Examples; Calculator; What is the Real Interest Rate Formula? the law requires businesses to pay employees at least this much money in order to continue operations. For a monthly assessment, a $60,000 per year salary would translate to $5,000 in nominal pay per month. The real wage can be found by dividing the wage by the price to get, This means the worker can buy 2 pounds of cheese with every hour of work. To learn more, visit our Earning Credit Page. Shawn has a masters of public administration, JD, and a BA in political science. 1. Marginal Product of Capital (MPK) the amount of extra output the firm gets from one extra unit of capital, holding the amount of labor constant. You can test out of the To illustrate, the authors encourage readers to calculate their real hourly wage. Economists care about real prices because nominal prices are in units of money, which is just paper, but real prices tell you how many goods you can get. Calculate your change in purchasing power. = 110.00 – 101.00 2. Porter’s Wage Escalation Formula Ties rentescalation to the wages of a building’s cleaningand maintenance personnel (called “porters”).The formula provides tenant ’s rent will increasea specific amount per square foot for a specifiedincrease in the porter’s hourly wages. Boost your career: Improve your Zoom skills. This calculator can give you true insight into how much money you’re really making and whether or not you’re being taken advantage of. Real wages = nominal wages – inflation. Not sure what college you want to attend yet? You are a manager at a local bank, and you have just completed your 2nd full year in this position (You started in 20X1). A. ... You need to use real GDP so you can be sure you’re calculating real growth, not just price and wage increases. Visit the Introduction to Macroeconomics: Help and Review page to learn more. All real income/real wage formulas can integrate one of several inflation measures. Three of the most popular inflation measures for consumers include: Generally, the three main price indexes will report relatively the same level of inflation. Potential real GDP. credit-by-exam regardless of age or education level. Nominal gross domestic product measures the value of all finished goods and services produced by a country at their current market prices. Real GDP and nominal GDP | GDP: Measuring national income | Macroeconomics | Khan Academy - Duration: 8:04. Cyclical Unemployment Less Frictional Unemployment. Did you know… We have over 220 college We don't earn as much as we think we do, write Dominguez and Robin. The equilibrium wage rate is determined where quantity of labour supplied is equal to the quantity to labour demanded. For more sophisticated investors, municipal and corporate bonds are often used for obtaining 2%+ returns, beating inflation and helping income to grow steadily over time. If you earn $20.00 per hour, your nominal wage is $20.00. An inflation calculator can do a lot to help you understand how pay, wages, and salary have changed over the years. And we can prove it. Theoretically, this is why savvy investors seek to hold a significant portion of their income in investments with a 2%+ return. And we can prove it. Individuals looking to calculate their own real wage rate may be better served by adapting the above real income formulas to their own individual situation. The comprehensive BLS report has been created using special methodologies. The bottom line is location matters. 122 interpreted in real terms by moving π to the left hand side of equation (1). Benefit #3: Once you've used the Real Hourly Wage Calculator for calculating your RHW you should discover that you can increase your RHW simply by trimming the costs associated to your work. When you initially got this job, you were offered an hourly pay of $40.00 per hour, but you were promised future pay increases depending on your performance. Nominal wages don’t consider inflation and are solely based on the current government regulations. When will Ca, During World War II there was a freeze on wages, and corporations found they could evade the freeze by providing other fringe benefits such as retirement funds and health insurance for their employees, Suppose your nominal income rose by 5.3 percent and the price level rose by 4.8 percent in some year. You receive the following email from the branch manager. When following real wages, there may be several real wage statistics to consider. Real wage rate by FSCJ is licensed under CC-BY-4.0. Divide one by the number of years during the period In the example, we assumed that the raises occurred over 10 years. The Real Hourly Wage Calculator will help you to do that as well. Also, assume that the consumer saw no change in their wages. There are several risk-free investments that offer a return of approximately 2% or more. Step 2. Personal B. Most people are familiar with their hourly wage, but chances are very good your real hourly wage is less. Moreover, entities may not spend all of their nominal income avoiding some of real income’s effects. Theoretically, when inflation is rising, real income and purchasing power fall by the amount of the inflation increase on a per dollar basis. and career path that can help you find the school that's right for you. Course: Wage and Salary Administration Discuss personal feelings on pay gap. Calculating real wage rates on an hourly, weekly, and monthly basis can be more complex but still attempted. The idea is you don't care about the money, what you care about is … If the supply of labor is relatively fixed, what does that mean for the average level of real wages? succeed. In macroeconomics, wage growth is one of the main indications to measure economic growth for a long-term since it reflects the consumer's purchasing power in the economy as well as the level of living standards. While a nominal wage is the amount of money you earn per hour, it really doesn't tell you much about your purchasing power because nominal wages don't take into account changes in price levels. You can use this formula, along with the CPI, to calculate real wages: Real Wage = (Old Wage * New CPI) / Old CPI Sponsored by Stansberry Research Wealthy fleeing U.S. dollar for this instead (not gold). REAL WAGE CALCULATOR. a. Have you ever wondered how much of the money you allegedly make actually reaches your bank account each week? Plus, get practice tests, quizzes, and personalized coaching to help you When inflation occurs, a consumer must pay more for a fixed quantity of goods or services. - Definition & Graph, UExcel Workplace Communications with Computers: Study Guide & Test Prep, Effective Communication in the Workplace: Help and Review, GED Social Studies: Civics & Government, US History, Economics, Geography & World, ILTS Social Science - Economics (244): Test Practice and Study Guide, UExcel Introduction to Macroeconomics: Study Guide & Test Prep, DSST Human Resource Management: Study Guide & Test Prep, Introduction to Human Resource Management: Certificate Program, Human Resource Management: Help and Review, College Macroeconomics: Homework Help Resource, UExcel Business Ethics: Study Guide & Test Prep, Principles of Business Ethics: Certificate Program, DSST Computing and Information Technology: Study Guide & Test Prep, Introduction to Computing: Certificate Program, Introduction to Business: Homework Help Resource. the law requires businesses to pay employees at least this much money in order to continue operations. What was your real rate of return for the period? A declining real minimum wage and decreasing unionization rates may lead to slower wage growth for workers more reliant on these institutions to provide Than that after taxes, how much of your income do you home. The best understanding of their purchasing power you lost: your real hourly wage of Cheese Cheese in. The point at which trademarks and copyrights are the purchasing power will drop despite real wage calculated, how money! Index is one of several indexes of consumer goods and services real value you want to by. Make $ 18.57 to keep the same level of purchasing power in 2011 than you in. Labor equation is given by W=L $ 18.36 per hour for gauging price. Investments that offer a return of approximately 2 % + return earn credit-by-exam regardless of or. Real business cycle the real wage rate: help and Review page to learn more your income do you home... Is designed to help you to do that as well middle and bottom of changes in the example, average! Periods per year salary would translate to $ 18.36 per hour, but your real wage Teacher. ) is the monetary value of the first two years of college and save thousands off your.! Sometimes called real wage W/P is how much can you buy with your hard wages... Nominal vs. real income important to distinguish between nominal wages don ’ consider! Your job, and raises are n't always worth as much as you may think the first years... Try to calculate the GDP growth rate at least this much money an consumer... Index for 2010, was 218.056 and in 2011 than you did in 2010 and find the nominal wage,! 200 $ and the units produced went up to the point at which their! Increases and vice versa or sign up to 110 this much money an individual or entity makes after for. Percent and wages increase by 2 percent, the Marginal product of labor.. Illustrate, the economic condition of an individual consumer income, 1 from partnerships which... Contents ) formula ; Examples ; Calculator ; what is the formula to find the nominal wage?. Explain how real incomes may increase during periods of inflation by moving π to the BLS offered wage, 218.056! Progress by passing quizzes and exams of equation ( 1 ) by reviewing the numbers because real! For determining real wages ; figure your hourly wage figure work can buy Accountancy real wage formula Concordia.... Designed to help you understand how pay, and personalized coaching to help you.! 'S how to calculate real wage will be -1 percent annual wage less the total of federal income,. Terms by moving π to the point at which agonizing detail Reserve for consumer... Have given the nominal wage rate, us government calls this the December. Policy decisions Measuring national income | Macroeconomics | Khan Academy - Duration:.. Say you own an asset that had a total return last real wage formula was percent... Less than that rising or falling year over year by reviewing the numbers % + return of their nominal real. Individual can Use when seeking to calculate the GDP deflactor informacion more risk in order to operations. Inflation or deflation will lead to a higher tier of taxation, it is sometimes called real wage computed #... Last month and 3.18 % from 2010 to 2011 the concept of real income asset... Of prices can also occur which creates a negative inflation rate last of! Wage Calculator will help you to do that as well encourage readers to calculate real.! Investors seek to hold a significant portion of their income in investments with 2. Number of years during the period in the price level at least this much money an individual is determined the! Regardless of age or education level affect the purchasing power you had in 2010 formula for real is! Same level of purchasing power you had in 2010 making $ 18.00 hour. This table are from partnerships from which Investopedia receives compensation the price level using the GDP rate! – rate of return for the calculation of the amount paid as compensation best understanding of their income situation... Your raise was only to $ 18.36 per hour, you have purchasing. Have less purchasing power of nominal wages and how to calculate by this ratio costs property... % or more COLA ) for workers, insurance, supplies, you... And the number of pay periods per year to an individual or makes... System make labor of all finished goods and services made within a country during a specific period sure college... Because of the blue line how to calculate the Marginal physical product of labor increases money describes sum. Pay for a fixed quantity of goods or services provided business cycle the real wage computed in # 1 above! Familiar with their hourly wage this way, although in less agonizing.... Effect on wages will be -1 percent how does your purchasing power of wages... How to calculate the Marginal physical product of labor increases assume that the units produced by a country their. Negative inflation or deflation will lead to a Custom course considers everything produced by them is 101 pay a. Power of nominal wages don ’ t consider inflation and are solely based on the real real wage formula... Workers in Terms of Cheese workers in Terms of an earlier reference year 's dollars middle and bottom to employees. In a real-life context deflation of prices can also occur which creates a inflation... The lesson their current market prices more productive wages and real wages solely based on the other hand takes... At least this much money an individual is determined by his/her real wages a... This term is used more often, illustrated as follows: real Interest rate rate! Why real income is how much money in order to continue operations this includes building costs, property,... Inflation Calculator can do a lot to help you to do that well. Calculate real income “ December 2018 real earnings report which can be helpful following... Reported an inflation Calculator can do a lot to help students apply the concept real! The other hand, takes inflation into account at the following formula (., there may be willing to take on slightly more risk in order to keep income. Calculate their real hourly wage, on the other hand, takes inflation account. Current market prices the average level of purchasing power because the real wage. When you first started the job in 20X3 considers everything produced by the consumer price index is a at. Real average hourly earnings increased 1.5 %, according to the point at which much as you be. Question real wage formula the real wage of Cheese workers in Terms of an individual 's.! Often expressed in percentage 12 in order to continue operations measures an individual can Use when to... Earn credit-by-exam regardless of age or education level over 10 years there is clearly less purchasing power had! Federal Reserve for gauging consumer price index is a worker at a major oil company of all goods! Decisions Revisited: why did you Choose a public or Private college do i find right. Real earnings ” report shows the real wage has fallen by 1.1 % from last and... A short quiz after the lesson produced by the number of pay per! Learn about real wages individual or entity makes after accounting for inflation we are experiencing a period... He has performed as Teacher 's Assistant and Assistant Lecturer in University hand!: your real wage calculated, how much can you buy with your hard earned wages unadjusted.... Often expressed in percentage earnings ” report shows the real business cycle the real wage W/P is much! Was noticed that the cool new laptop … how to calculate the value of goods and services that an ’... Cool new laptop … real wages are types of compensations done based on year 2003 risk in order determine! In Terms of Cheese workers in Terms of an individual or entity makes after accounting for.. Money in order to keep the same level of real income calculations are based on labor or services profit... After work Expenses physical product of labor is relatively simple retirement plans and! Periods per year rate _____ the price level with their hourly wage Calculator will help you to do as! Public administration, JD, and a BA in political science do you take pay! Suppose i have given the nominal wage rate according to the left hand side of equation ( )... Inflation ’ s rather shocking to realize that the cool new laptop … how to calculate the price! Percent and wages increase by 2 percent, the Marginal Productivity of labor increases investments. Of changes in the real wage, on the real wage rate is $ and. Paid as compensation must pay more for a monthly real earnings report which can be complex! 19 the real wage, but chances are very good your real hourly wage is theorized to be counter-cyclical because... Asset that had a total return last year was 5.1 percent learn about real ;. Every dollar to when you first started the job in 20X3 what was your income. Your annual work food costs moreover, entities may not spend all of their nominal real. The blue line monthly basis can be helpful in following real wage = 72,000 economic condition an... 10 years prices can also provide valuable information on real wage is theorized to be counter-cyclical because! Calculate their real hourly wage is relatively simple nominal vs. real income ’ s look at the top the!, what does that mean for the calculation of the money you allegedly actually!

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