Explain why rising prices do not necesssarily mean declining living standards - Essay Example

Some people are intended to spend loads of money and they also easily can do. In the last we will see how rise in prices affect the living standards.2 Before going into the depth of the topic we will discuss concepts of income in detail. It can be defined as the income of the individuals or people after adjusting for inflation. It can be measured by subtracting the inflation from the nominal income. Mathematically it can be written as: Real income is a more useful indicator of well-being; it is based on the amount of goods and services that can be purchased with the income.

It involves real variables as real income, real GDP and real interest rates. These real variables can be measured in physical units (standards of measurements of physical quantities). Nominal Income is the income that has not been adjusted against inflation and decreasing buying power. It involves nominal variables as nominal income, nominal GDP and nominal interest rates. These nominal variables are calculated in monetary units (Each Country uses a Monetary Unit of some kind some may use more than one depending on the position and nature of the economy).

Although real variables and nominal variables are different with each other and they are influenced by each other. Both are separate in nature and use. Labor is a calculation of the work done by human beings. It is usually contrasted with such other factors of production as land and capital. There are some theories created on this concept called human capital. This refers to the skills those workers own). Other theory is Macro-Economics system theory that thinks human capital opposition in terms.

It is defined as a sustained raise in general price levels for some set of goods and services in a given financial system over a period of time. It is measured as the percentage rate of change of a price index. There are so many inflation measures in use as there are different