Purchasing power is the amount of goods and services that can be purchased with a unit of
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general ...
. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would be the case today, indicating that the currency had a greater purchasing power in the 1950s.
If one's monetary income stays the same, but the
price level
The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set ...
increases, the purchasing power of that income falls.
Inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
does not ''always'' imply falling purchasing power of one's money income since the latter may rise faster than the price level. A higher
real income
Real income is the income of individuals or nations after adjusting for inflation. It is calculated by dividing nominal income by the price level. Real variables such as real income and real GDP are variables that are measured in physical u ...
means a higher purchasing power since real income refers to the income adjusted for inflation.
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, like
US dollars
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
, 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 the ...
for the purpose of international
transfer of payment for goods and services.
As
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...
noted, having money gives one the ability to "command" others'
labor
Labour or labor may refer to:
* Childbirth, the delivery of a baby
* Labour (human activity), or work
** Manual labour, physical work
** Wage labour, a socioeconomic relationship between a worker and an employer
** Organized labour and the la ...
, 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 ar ...
or currency.
For a
price index, 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 (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...
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).
EUROSTAT
Eurostat ('European Statistical Office'; DG ESTAT) is a Directorate-General of the European Commission located in the Kirchberg, Luxembourg, Kirchberg quarter of Luxembourg City, Luxembourg. Eurostat's main responsibilities are to provide stati ...
defines purchasing power standard (PPS) as an artificial currency unit.
See also
*
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 currencies and providing a test of the extent to which market exchange rates result ...
*
Collective buying power
Collective buying power is the ability of a group of consumers to leverage the group size in exchange for discounts.
In the marketplace
Many different companies have used this concept to build business plan
A business plan is a formal writte ...
*
Constant purchasing power accounting
*
Consumer price index
A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.
Overview
A CPI is a statisti ...
*
Consumerism
Consumerism is a social and economic order that encourages the acquisition of goods and services in ever-increasing amounts. With the Industrial Revolution, but particularly in the 20th century, mass production led to overproduction—the su ...
*
Consumption (economics)
Consumption is the act of using resources to satisfy current needs and wants. 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 many o ...
*
Fair trade
Fair trade is an arrangement designed to help producers in developing countries achieve sustainable and equitable trade relationships. The fair trade movement combines the payment of higher prices to exporters with improved social and envir ...
*
Free trade
Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econ ...
*
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
*
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 ...
*
Purchasing power of the U.S. dollar
*
Purchasing power parity
Purchasing power parity (PPP) is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currencies. PPP is effectively the ratio of the price of a bask ...
References
External links
MeasuringWorth.comhas a
Asah mochte rowgni rusa memo
mocht rowgni rusaem
calculatorwith different measures for bringing values in Pound sterling 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.
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