Nominal And Real Income In A Real Dollar Store
Abstract
In this paper, the distinction between nominal and real income is highlighted by positing the existence of an imaginary “real dollar store.” In this store, all items are sold at a price of one dollar in the base year and the price of each is indexed to the cost of living. Hence, such concepts as “real income” and “real rate of interest” can be illustrated in physical terms in a way that lacks the ambiguity that comes with the term “dollar of the base year.”
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