Purchasing power refers to the amount of products and services available for purchase with a certain currency unit. For example, if you took one unit of cash to a store in the 1950s, you could buy more products than you could now, showing that the currency had more purchasing power back then.
If one's income remains constant but prices rise, their purchasing power decreases. Inflation does not always result in decreased purchasing power, especially if income exceeds price levels. A larger real income means more purchasing power, as it corresponds to the income itself.
Traditionally, the purchasing power of money depended heavily upon the local value of gold and silver, but was also made subject to the availability and demand of certain goods on the market. Most modern
fiat currencies
Fiat money is a type of government-issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, ...
, like
US dollars
The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...
, are traded against each other and commodity money in the
secondary market
The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of ...
for the purpose of international
transfer of payment for goods and services.
Scottish economist
Adam Smith
Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
noted that having money gives one the ability to "command" others'
labor, so purchasing power to some extent is power over other people, to the extent that they are willing to trade their labor or goods for
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
or currency.
For a
price index
A price index (''plural'': "price indices" or "price indexes") is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a specific region over a defined time period. It is a statistic ...
, its value in the base year is usually normalized to a value of 100. The purchasing power of a unit of currency, say a dollar, in a given year, expressed in dollars of the base year, is 100/''P'', where ''P'' is the price index in that year. So, by definition, the purchasing power of a dollar decreases as the price level rises.
Adam Smith
Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
used an hour's labour as the purchasing power unit, so value would be measured in hours of labour required to produce a given quantity (or to produce some other good worth an amount sufficient to purchase the same).
See also
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Big Mac Index
The Big Mac Index is a price index published since 1986 by ''The Economist'' as an informal way of measuring the purchasing power parity (PPP) between two currency, currencies and providing a test of the extent to which market exchange rates re ...
*
Collective buying power
*
Constant purchasing power accounting
*
Consumer price index
A consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption purposes by households. It is calculated as the weighted average price of a market basket of Goods, consumer goods and ...
*
Consumerism
Consumerism is a socio-cultural and economic phenomenon that is typical of industrialized societies. It is characterized by the continuous acquisition of goods and services in ever-increasing quantities. In contemporary consumer society, the ...
*
Consumption (economics)
Consumption refers to the use of resources to fulfill present needs and desires. It is seen in contrast to investing, which is spending for acquisition of ''future'' income. Consumption is a major concept in economics and is also studied in man ...
*
Fair trade
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Free trade
Free trade is a trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold Economic liberalism, economically liberal positions, while economic nationalist politica ...
*
Group buying
Group buying, also known as collective buying, offers products and services at significantly reduced prices on the condition that a minimum number of buyers would make the purchase. Origins of group buying can be traced to China, where it is known ...
*
Group purchasing organization
In the United States, a group purchasing organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.
Many GPO ...
*
Measuring economic worth over time The measurement of economic worth over time is the problem of relating past prices, costs, values and proportions of social production to current ones. For a number of reasons, relating any past indicator to a current indicator of worth is theoreti ...
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Purchasing power of the U.S. dollar
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Purchasing power parity
Purchasing power parity (PPP) is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currency, currencies. PPP is effectively the ratio of the price of a market bask ...
References
External links
MeasuringWorth.comhas
calculatorwith different measures for bringing values in
Pound sterling
Sterling (symbol: £; currency code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound is the main unit of sterling, and the word '' pound'' is also used to refer to the British currency general ...
from 1264 to the present and in US dollars from 1774 up to any year until the present. Th
Measures of Worth pagediscusses which would be the most appropriate for different things.
Purchasing Power Calculatorby Fiona Maclachlan,
The Wolfram Demonstrations Project
The Wolfram Demonstrations Project is an open-source collection of interactive programmes called Demonstrations. It is hosted by Wolfram Research. At its launch, it contained 1300 demonstrations but has grown to over 10,000. The site won a Pa ...
.
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