Currency's Purchasing Power Measure
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A Currency's Purchasing Power Measure is an economic measure that evaluates a currency's value based on the quantity and quality of goods or services that one unit of money can buy in a specific time period and location.
- AKA: Monetary Purchasing Power, Currency Value Index.
- Context:
- It can typically quantify real currency value through goods purchasing capability.
- It can typically track currency value changes over time periods using price indexes.
- It can typically compare living standards across different currency zones.
- It can typically measure inflation effects on currency value.
- It can typically serve as a benchmark for monetary policy effectiveness.
- ...
- It can often fluctuate based on supply chain disruptions and commodity price shocks.
- It can often reveal economic inequality when analyzed across income brackets.
- It can often decline during high inflation periods due to currency devaluation.
- It can often influence consumer behavior and saving patterns.
- ...
- It can range from being a Domestic Currency's Purchasing Power Measure to being an International Currency's Purchasing Power Measure, depending on its geographical scope.
- It can range from being a Historical Currency's Purchasing Power Measure to being a Current Currency's Purchasing Power Measure, depending on its reference time frame.
- It can range from being a Basic Currency's Purchasing Power Measure to being a Comprehensive Currency's Purchasing Power Measure, depending on its goods basket complexity.
- ...
- It can be calculated using consumer price index for currency's purchasing power comparison across time periods.
- It can be calculated using purchasing power parity for currency's purchasing power comparison across countrys.
- It can be indexed to a base year value (typically 100) for currency's purchasing power tracking over time.
- It can be disaggregated by product category to measure currency's purchasing power for specific good types.
- It can be expressed in years of work required to purchase essential goods at median wage.
- It can illustrate monetary policy impacts on household wealth and consumer welfare.
- ...
- Examples:
- Currency's Purchasing Power Measure by country, such as:
- National Currency's Purchasing Power Measures, such as:
- U.S. Dollar Purchasing Power Measure tracking American currency value against consumer goods basket.
- Euro Purchasing Power Measure comparing European currency value across Eurozone countrys.
- Japanese Yen Purchasing Power Measure showing Japanese currency value changes since the 1980s economic boom.
- Regional Currency's Purchasing Power Measures, such as:
- National Currency's Purchasing Power Measures, such as:
- Currency's Purchasing Power Measure by time period, such as:
- Currency's Purchasing Power Measure by methodology, such as:
- Basket-Based Currency's Purchasing Power Measures, such as:
- Comparison-Based Currency's Purchasing Power Measures, such as:
- Currency Purchasing Power Parity Measure comparing currency values across national economies.
- Big Mac Index as a simplified currency's purchasing power measure using a single product.
- Currency's Purchasing Power Measure applications, such as:
- Living Standard Currency's Purchasing Power Measures, such as:
- Years of Work Measure calculating time required at median wage to purchase essential goods.
- Purchasing Power by Wage Percentile showing currency value distribution across income levels.
- Living Standard Currency's Purchasing Power Measures, such as:
- ...
- Currency's Purchasing Power Measure by country, such as:
- Counter-Examples:
- Nominal Exchange Rates, which measure currency value against other currencies without accounting for purchasing power differences.
- Currency Strength Indexes, which track currency performance in foreign exchange markets rather than goods-purchasing ability.
- Inflation Rates, which measure the rate of change in price levels rather than the absolute purchasing power.
- Wage Measures, which track income levels rather than what that income can buy.
- Asset Valuation Measures, which evaluate investment worth rather than consumption capability.
- See: Inflation Rate, Consumer Price Index, Purchasing Power Parity, Cost of Living Index, Real Effective Exchange Rate, Currency Devaluation, Monetary Policy.
References
2015
- (Wikipedia, 2015) ⇒ http://en.wikipedia.org/wiki/purchasing_power Retrieved:2015-6-21.
- Purchasing power (Each retroactively called adjusted for inflation) is the number of goods or services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it is probable that it would have been possible to buy a greater number of items than would today, indicating that one would have had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat money emitted by government sanctioned agencies. Most modern fiat currencies like US dollars are traded against each other and commodity money in the secondary market for the purpose of international transfer of payment for goods and services. 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: : [math]\displaystyle{ C_t = C(1 + i)^{-t}\, = \frac{C}{(1+i)^t} \, }[/math] where in this case i is an assumed future annual inflation rate.
- Purchasing power (Each retroactively called adjusted for inflation) is the number of goods or services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it is probable that it would have been possible to buy a greater number of items than would today, indicating that one would have had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat money emitted by government sanctioned agencies. Most modern fiat currencies like US dollars are traded against each other and commodity money in the secondary market for the purpose of international transfer of payment for goods and services. 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.
2014
- http://www.investopedia.com/terms/p/purchasingpower.asp
- The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase.
- In investment terms, the dollar amount of credit available to a customer to buy additional securities against the existing marginable securities in the brokerage account.