Purchasing power (sometimes retroactively called adjusted for
inflation) is the number and quality or value of goods and 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 be the case 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
2 See also
4 External links
Traditionally, the purchasing power of money depended heavily upon the
local value of gold and silver, but was also made subject to the
availability and demand of certain goods on the market. 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.
not always imply falling purchasing power of one's money income since
the latter 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
displaystyle C_ t =C(1+i)^ t ,
where in this case i is an assumed future annual inflation rate.
Adam Smith used an hour's labour as the purchasing power unit, so
value would be measured in hours of labour required to produce a given
quantity (or to produce some other good worth an amount sufficient to
purchase the same).
Big Mac Index
Collective buying power
Constant purchasing power accounting
Consumer price index
Group purchasing organization
Measuring economic worth over time
Purchasing power parity
^ Guy Le Strange, Purchasing Power in 1889 Compared with Same Currency
in 985 CE, in: Mukaddasi, Description of Syria, Including Palestine,
London 1886, p. 44.
MeasuringWorth.com has a calculator with different measures for
bringing values in
Pound sterling from 1264 to the present and in US
Dollars from 1774 up to any year until the present. The Measures of
Worth page discusses which would be the most appropriate for different
Purchasing Power Calculator by Fiona Maclachlan, The Wolfram