Final answer:
No, if your nominal wage increases by 25%, your purchasing power will not necessarily increase by the same percentage. The actual increase in purchasing power depends on the rate of inflation.
Step-by-step explanation:
No, if your nominal wage increases by 25%, you will not necessarily have a 25% increase in purchasing power. This is because the nominal wage refers to the amount of money you earn in absolute terms, without taking into account the effects of inflation.
Inflation is the general increase in prices over time, and it erodes the purchasing power of money. Therefore, even though your nominal wage may have increased by 25%, the actual increase in your purchasing power will depend on the rate of inflation.
To understand this better, let's take an example. Suppose your current nominal wage is $1,000 per month and the rate of inflation is 5%. If your nominal wage increases by 25% to $1,250, your purchasing power will not increase by the same percentage.
To calculate your real wage, you need to adjust for inflation. In this case, your real wage increase would be $1,250*(1-0.05) = $1,187.50. This means your purchasing power has increased by 18.75%.
Therefore, it is important to consider both nominal wage increases and the rate of inflation to determine the actual increase in purchasing power.