Purchasing power


Purchasing power

Purchasing power is the amount of value of a good/services compared to the amount paid with a currency. Currency can be either a commodity money, like gold or silver, or fiat currency like US dollars which are the world reserve currency. 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 money 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 real income, since one's money income may rise faster than 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:

:C_t = C(1 + i)^{-t}, = frac{C}{(1+i)^t} ,

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

ee also

*Purchasing power parity
*Consumer Price Index
*Fair Trade
*Free Trade
*Group buy
*Collective buying power

External links

* [http://www.measuringworth.com/ MeasuringWorth.com] has a [http://www.measuringworth.com/uscompare/ calculator] with 7 different measures for bringing US $ values from the late 1700s up to any year until 2006. The [http://www.measuringworth.com/worthmeasures.html Measures of Worth page] discusses which would be the most appropriate for different things.
* [http://demonstrations.wolfram.com/PurchasingPowerCalculator/ Purchasing Power Calculator] by Fiona Maclachlan, The Wolfram Demonstrations Project.


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Look at other dictionaries:

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  • purchasing power — 1) N UNCOUNT The purchasing power of a currency is the amount of goods or services that you can buy with it. The real purchasing power of the rouble has plummeted. 2) N UNCOUNT The purchasing power of a person or group of people is the amount of… …   English dictionary

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  • purchasing power — pur|chas|ing pow|er [ pɜrtʃəsıŋ ,paur ] noun uncount FORMAL 1. ) the ability of people to buy goods and services, usually based on how much they earn and save: The purchasing power of teenagers has increased enormously. 2. ) the value of a… …   Usage of the words and phrases in modern English

  • purchasing power — noun (U) 1 the amount of money that a person or group has available to spend compared to other people: Widespread wage rises result in increased purchasing power. 2 the value of a unit of money considered in terms of how much you can buy with it …   Longman dictionary of contemporary English

  • purchasing power — UK [ˈpɜː(r)tʃəsɪŋ ˌpaʊə(r)] / US [ˈpɜrtʃəsɪŋ ˌpaʊr] noun [uncountable] formal 1) the ability of people to buy goods and services, usually based on how much they earn and save The purchasing power of teenagers has increased enormously. 2) the… …   English dictionary

  • purchasing power — / pɜ:tʃɪsɪŋ ˌpaυə/ noun the quantity of goods which can be bought by a particular group of people or with a particular sum of money ● the purchasing power of the school market ● The purchasing power of the pound has fallen over the last five… …   Dictionary of banking and finance


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