Question

2.         Explain how an increase in your nominal income and a decrease in your real income might occur simultaneously.

3.         In a speech that Senator Kennedy gave when he was running for president in 1968, he said the following about GDP:

                        [It] does not allow for the health of our children, the quality of their education,

                        or the joy of their play. It does not include the beauty of our poetry or the

                        strength of our marriages, the intelligence of our public debate or the integrity

            of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes

            life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.

Was Robert Kennedy right? If so, why do we care about GDP?

Answer 1

2. When the cost of living increases faster than increase in nominal income, then real income will decrease. For example- if nominal income increases by 10% and cost of living increases by 20% then it will cause a decrease in real income from 100 to (110/1.20) = 91.67. That means real income will decrease by (100 - 91.67)% = 8.33% .