Consumers are most conscious of monetary prices of products but most have the intuition that the really important thing is the price of product to other prices such as the wage rate. And, of course, the important thing about a wage rate is its level relative to the price of products.

Relative prices just refers to the ratio of prices. For example, if the price of gasoline is $0.25 per gallon and the wage rate is $1.00 per hour then the relative price of gasoline is 0.25 hours of labor per gallon. If at another time the price of gasoline is $2.00 per gallon and the wage rate is $10.00 per hour then the relative price of gasoline is 0.2 hours per gallon and, thus the relative price of gasoline has fallen even though the monetary price has risen from $0.25 per gallon to $2.00 per gallon. If incomes went up in proportion to the wage rate then we would expect consumers to buy more gasoline at $2.00 per gallon than consumers did at $0.25 per gallon. The important prices are the relative prices. For this reason relative price are sometimes called real prices.

Relative prices are often expressed in terms of consumer price indices. A consumer price index is constructed by establishing what market basket of goods and services the average consumer bought in some base year. This is usually done by means of a survey. The cost of that market basket of goods and services is calculated using the base year's prices and another year's prices, say the current year. The ratio of the cost in current year's prices to the cost in the base year's prices is the consumer price index for the current year relative to the base year. The price index is usually expressed as a percentage which means the actual ratio is multiplied by 100. This means that if the ratio of the costs is 1.25 the index is reported as being 125 and both figures mean that the price on average in the current year are 125 percent of what they were in the base year.

In the table below the Consumer Price Indices (CPI) for the years 1958 to 2002 are given along with the prices indices for motor fuels. The CPI are relative to average prices in the years 1982-84. The price index for motor fuels is the cost of a basket of motor fuels (gasolines of various grades and diesel fuel) in a given year relative to what that basket cost on average in the base years of 1982-84.

The third column in the above table is an index of the price level of motor fuels relative to the price of all consumer goods and services. As can be seen from the above table the prices of gasoline and diesel fuel was not relatively high in 2002. In fact motor fuels were relatively more expensive in 1958 than they were in 2002. Phil Stuart tablated the price of supreme unleaded gasoline each time he filled up his vehicle in the Fort Worth, Texas area over the period from 1979 to 2003. A graph of his data, both the actual price and the price adjusted for inflation can be seen at Gasoline Price History

Relative prices are important in making international comparison. For example, if one hears that a typical wage in China for a factory worker in the early 1990's was 200 to 300 Yuan for a month of ten-hour work days with only two days off. That is a pretty stiff work schedule and when one finds that is equivalent to $25 to $35 it seems that no single person could survive with that income much less a family. But the crucial matter is the level of prices in China. The dollar equivalent prices of food and other essentials are so low that the 200 to 300 Yuan provides a spartan but livable standard of living for a family. In contrast, in Japan the dollar equivalent of Japanese wages may seem high but the costs of goods are even higher. The price of rice in Japan is roughly six times the international price. The price of a melon may the equivalent of fifty dollars, that of an apple five dollars. So the living standard of Japanese consumers is significantly lower than what one would expect on the basis of the dollar-equivalent of incomes. This leads to the saying: Japan: Rich country, poor people.

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