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Purchasing power is the number of goods/services that can be purchased with a unit of currency
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
. 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
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
 can be either a commodity money
Commodity money

Commodity money is money whose Value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
, like gold
Gold

Gold is a chemical element with the symbol Au and atomic number 79. It is a highly sought-after precious metal, having been used as money, as a store of value, in jewelry, in sculpture, and for ornamentation since the beginning of recorded history....
 or silver
Silver

Silver is a chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal....
, or fiat currency
Fiat currency

Fiat currency is money that exists because an authority or custom declares it to be money. . It achieves value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable....
 like US dollars which are the world reserve currency
Reserve currency

A reserve currency is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves....
.






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Purchasing power is the number of goods/services that can be purchased with a unit of currency
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
. 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
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
 can be either a commodity money
Commodity money

Commodity money is money whose Value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
, like gold
Gold

Gold is a chemical element with the symbol Au and atomic number 79. It is a highly sought-after precious metal, having been used as money, as a store of value, in jewelry, in sculpture, and for ornamentation since the beginning of recorded history....
 or silver
Silver

Silver is a chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal....
, or fiat currency
Fiat currency

Fiat currency is money that exists because an authority or custom declares it to be money. . It achieves value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable....
 like US dollars which are the world reserve currency
Reserve currency

A reserve currency is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves....
. As Adam Smith
Adam Smith

Adam Smith was a Scotland Ethics and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and The Wealth of Nations....
 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
Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value....
 or currency
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
.

If money income stays the same, but the price level
Price level

A price level is a hypothetical measure of overall prices for some set of Good s and Service s, in a given region during a given interval, normalized relative to some base set....
 increases, the purchasing power of that income falls. Inflation
Inflation

In economics, inflation is a rise in the general price level of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply ; however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflatio...
 does not always imply falling purchasing power of one's real income
Real income

Real income is the income of individuals or nations after adjusting for inflation. It is calculated by subtracting inflation from the Real versus nominal value income....
, since one's money income may rise faster than inflation.

For a price index
Price index

A price index is a normalized average of prices for a given class of Good s or Service s in a given region, during a given interval of time. It is a statistic designed to help to compare how these prices, taken as a whole, differ between time periods or geographical locations....
, 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
Present value

Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk....
:

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

In economics, the inflation rate is a measure of inflation, the rate of increase of a price index .It is the percentage rate of change in price level overtime....
.

See also


  • Group Purchasing Organization (GPO)
  • Purchasing power parity
    Purchasing power parity

    The purchasing power parity theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price....
  • Consumer Price Index
    Consumer price index

    A consumer price index is a measure of the average price of consumer goods and services purchased by households. It is a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer....
  • Fair Trade
    Fair trade

    Fair trade is an organized social movement and market-based approach to empowering developing country producers and promoting sustainability. The movement advocates the payment of a fair price as well as social and environmental standards in areas related to the production of a wide variety of goods....
  • Free Trade
    Free trade

    Free trade is a type of trade policy that allows traders to act and transact without coercive interference from government. Thus, the policy permits trading partners mutual gains from trade, with goods and services produced according to the law of comparative advantage....
  • Group buy
  • Collective buying power
    Collective buying power

    Collective buying power is when a group of consumers come together and use the old rule of thumb, there's power in numbers, to leverage the group size in exchange for discounts....
  • Constant Purchasing Power Accounting
    Constant Purchasing Power Accounting

    'Constant Purchasing Power Accounting' as approved by the International Accounting Standards Board is an alternative basic accounting model which accountants can choose to implement a financial capital concept of invested purchasing power where under they choose to measure financial capital maintenance in units of constant purchasing powe...
  • Oil burden
    Oil burden

    Oil burden is the volume of petroleum consumed multiplied by the average Price of petroleum and divided by nominal gross domestic product.This gives the proportion of the world economy devoted to buying oil....


External links

  • has a with 7 different measures for bringing US $ values from the late 1700s up to any year until 2006. The discusses which would be the most appropriate for different things.
  • by Fiona Maclachlan, The Wolfram Demonstrations Project.