Time Value of Money: Inflation and Average Salary

Subject: Economics
Pages: 2
Words: 303
Reading time:
< 1 min

The time value of money assumes that the value of money today is greater than the value of money tomorrow. This theory is explained by the presence of inflation rates on market. In the case of salaries, the amount of salary paid is calculated based on the change of time and inflation rates in the economy. Inflation measures the general price index changes in the economy. Inflation rates and the amount of salary in such countries as the USA has a clear correlation because of a strong monetary policy, which controls inflation trends. That’s why if to compare salary in the USA 50 years ago and present salary, taking into consideration inflation indexes during last 50 years, it will be clear that salary changed at the rate of economic growth.

Although we have a subprime crisis at the moment which is affecting the economy’s performance, inflation rates have not increased in comparison to other countries. If you compare the inflation rate in the US and countries like Israel where there is constant turmoil, the inflation rate in the US is lower meaning that the salaries will not change at a higher rate in Israel. This is because of the Middle East crisis.

The US dollar is stable and has remained stable for a long period meaning that even if there are changes in the inflationary rate, it will not affect the economy as such that will lead to a faster rate of the wage increase. Secondly, every country is indebted to the US and the dollar is an international currency which is not the case with the US currency.

Therefore, the average rate of salaries in the US will not be the same as the average rate from other countries.