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Purchasing Power

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The purchasing power is the amount of goods or services that can be achieved with a fixed amount of money depending on the price level.

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 held is known as purchasing power.

Purchasing power and needs

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

From the above we can see that the measurement of purchasing power is a good tool when it comes to establishing comparisons between subjects from different countries or from different periods of time. Through this comparison, it's 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 affects purchasing power. In addition, it isn't only measured by the value of a good, but a basket of goods, usually primary (essential goods), is created to establish a logical comparison.

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

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

Example of purchasing power

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

We will observe that with Mark's payroll, he will now be able to buy fewer products if he decides to spend 200 $ on his purchase. Another alternative is to increase your amount for the same. In short, your purchasing power will have decreased.

It's 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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