Suppose the automaker company, General Motors negotiating a wage contract with the United Auto Workers (UAW) union. Both parties are interested in the real wage, which is the nominal wage corrected for inflation. Suppose that General Motors and the UAW (the United Auto Workers) agree on a wage of $32 per hour to be paid during 2021. Both General Motors and the UAW expected that the price level will increase from 100 in 2020 to 105 in 2021, so the inflation rate will be 5%. We can calculate the expected real wage as follows: (Expected) Real wage = (Nominal wage/Price level) x 100 = ($32/105) x 100 = $30.48
But, the real wage when the actual inflation rate turns out to be only 2% (i. e., the price level rises only to 102 during 2021) will be , which is than General Motors and the UAW had expected. If the actual inflation rate is higher is 7% (i. e., the price level rises to 107 during 2021), the real wage will be , which is than General Motors and the UAW had expected.