What is purchasing power?

The amount of goods or services that can be obtained with a certain amount of money depending on the price level is what is called "purchasing power". In other words, this concept refers to the relationship between the price that an individual, a company or a country pays to satisfy their needs and the level of resources that they possess. However, it is important to consider the value of the currency with which the purchase is made before determining what the purchasing power of a person or entity is.

Next, we review all the characteristics of purchasing power and everything you need to know about this economic concept.

What factors influence a person's purchasing power?

Purchasing power is often used to measure the level of wealth of a subject: its measurement is directly related to the Consumer Price Index (CPI) and it is an ideal resource to compare the levels of wealth between individuals or entities from different countries, cities or regions in a given period of time. In this sense, the CPI can be calculated to obtain an estimate of household consumption.

One of the factors that most influence the calculation of purchasing power is the inflationSince there is a sustained increase in the prices of goods and services in a country, people have less purchasing power. In addition, if the income of individuals is maintained over time, but the price of goods and services increases, people see a lower purchasing power.

With this, inflation and the loss of purchasing power are closely related: when the products or services that we buy regularly become more expensive, but our income remains the same, then there is a loss of our purchasing power and, consequently, a direct impact on the cost of living.

Example to understand the concept of purchasing power

Let's suppose that our brother Luis has a salary of 1000 euros and he spends around 200 euros in his shopping basket every month. If in Spain, his country, there is a rise in food prices (inflation), the same basket that Luis usually purchases each month could increase its value to 230 euros. In this way, Luis will not be able to buy so many products if he decides to spend the same 200 euros on his purchase, or else, he will have to increase the expense for this purpose. Ultimately, your purchasing power will have decreased.

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