Currency's Purchasing Power Measure
A Currency's Purchasing Power Measure is an economic measure of a currency value based in terms of the amount of goods or services that one unit of money can buy.
- Example(s):
- See: Inflation Rate, Currency, Commodity Money, Secondary Market.
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.