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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:
where in this case i is an assumed future annual inflation rate.
See also
- Purchasing power parity
- Consumer Price Index
- Fair Trade
- Free Trade
- Group buy
- Collective buying power
External links
- MeasuringWorth.com has a calculator with 7 different measures for bringing US $ values from the late 1700s up to any year until 2006. The Measures of Worth page discusses which would be the most appropriate for different things.
- Purchasing Power Calculator by Fiona Maclachlan, The Wolfram Demonstrations Project.
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- This page was last modified on 19 November 2008, at 04:32.
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