Purchasing Power

Purchasing power is the number of goods or services that can be achieved with a fixed amount of money depending on the level of prices.

Individuals, companies or countries use their resources to meet the needs they have. The relationship between the price paid for them and the level of resources that is possessed is known as purchasing power.

It is important to take into account the basic idea behind this definition: we will have more purchasing power the more needs we can cover with a certain amount of money. For this, we must define the situation in which we find ourselves; in other words, the value of the currency with which we are buying.

From the above, we can see that the measurement of purchasing power is a good tool when establishing comparisons between subjects from different countries or different periods of time. Through this comparison, it is possible to distinguish the economic level of individuals from the past and present, or from other individuals who share the same time but in different countries with their corresponding currencies. The costs of living in a country with a devalued currency affect purchasing power. Furthermore, it is not only measured by the value of a good but a basket of goods, normally primary goods (basic goods), is created in order to establish a logical comparison.

The latter shows us the idea that there are countries with different costs of living, where it is evident that an individual will have different purchasing power.

The possibility of people to acquire goods or services they seek is directly related to the factor of inflation. In other words, in the case of a country where there is an increase in the prices of goods or services, the person we are studying will experience a decrease in their purchasing power. This will happen because your income (salary, investments and other types of resources) have not grown at the same rate.

Example of purchasing power

For example, suppose that our friend Miguel has a salary of 1000 euros and spends in his basket of the monthly purchase 200. If Spain, his country, suffers inflation that causes a rise in food prices, the same basket that Miguel used to Acquire now has a value of 230 euros.

We will observe that with Miguel’s payroll, now he will be able to acquire fewer products if he decides to spend 200 euros on his purchase. Another alternative is to increase your amount destined to the same. In short, your purchasing power will have decreased.

It is clear then that to establish measures and comparisons of purchasing power, an important fact to take into account is that shown by the CPI (Consumer Price Index).

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