Purchasing Power

Purchasing power (sometimes retroactively called adjusted for inflation) is the amount of goods or services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat currency, or free-floating market-valued currency like US dollars. As Adam Smith noted, 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 or currency.

If one's monetary income stays the same, but the price level increases, the purchasing power of that income falls. Inflation does not always imply falling purchasing power of one's money income since it may rise faster than the price level. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.

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. The purchasing power in today's money of an amount C of money, t years into the future, can be computed with the formula for the present value:

where in this case i is an assumed future annual inflation rate.

Other articles related to "power, purchasing power":

Medium Of Exchange - Definition
... welfare and justice.Money helps us in gaining power of buying ... a medium of exchange should have stable purchasing power (Value) and therefore it should possess the following characteristics value common assets constant utility low cost of ... It should have constant intrinsic value and stable purchasing power ...
Constant Purchasing Power Accounting - Capital Maintenance in Units of Constant Purchasing Power As Per The IASB's Framework
... capital maintenance in units of constant purchasing power as authorized in IFRS in the Framework, Par 104 (a) in 1989 ... concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity ... with the maintenance of nominal invested capital or the purchasing power of invested capital ...
Minimum Wage In The United States - Reasons For Economic Controversy
... employers and workers set their wages in nominal terms, they are unable to predict the exact purchasing power of those wages ... The real wage is the purchasing power of wages when adjusted for inflation, but inflation--the purchasing power of money and therefore of wages--depends on total levels of investment ... of rising wages by using their market power to raise prices fast enough to prevent real gains among workers ...

Famous quotes related to purchasing power:

    At present cats have more purchasing power and influence than the poor of this planet. Accidents of geography and colonial history should no longer determine who gets the fish.
    Derek Wall (b. 1965)

    Purchasing power is a license to purchase power.
    Raoul Vaneigem (b. 1934)