purchasing power

1. The ability to purchase, generally measured by income.
2. The value of a particular monetary unit in terms of the goods or services that can be purchased with it.

1. The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase.

2. In investment terms, the dollar amount of credit available to a customer to buy additional securities against the existing marginable securities in the brokerage account.

Investopedia Says:
1. To measure purchasing power, you'd compare against price index such as CPI. A simple way to think about purchasing power is to imagine if you made the same salary as your grandfather. Clearly you could survive on much less a few generations ago, however, because of inflation, you'd need a greater salary just to maintain the same quality of living.

2. Each jurisdiction has its own rules governing margin transactions. In the United States you can purchase up to 50% of securities on margin, so, if you had $10,000 in a margin account, you'd be able to purchase up to $20,000 worth of securities. Said another way, you have an extra $10,000 of purchasing power (buying power).

Related Links:
What causes inflation? How does it affect your investments and standard of living? This tutorial has the answers. All About Inflation
Learn how this phenomenon can fool you when you're analyzing a company's financial statements. The Forgotten Problem Of Inflation
Learn how past inflationary periods can predict future real rates of return for cash investments. The Money Market: A Look Back

Economics: value of money as measured by the goods and services it can buy. For example, the Purchasing Power of the Dollar can be determined by comparing an index of consumer prices for a given base year to the present.

Investment: amount of credit available to a client in a brokerage account for the purchase of additional securities. Purchasing power is determined by the dollar amount of securities that can be margined. For instance, a client with purchasing power of $20,000 in his or her account could buy securities worth $40,000 under the Federal Reserve's currently effective 50% Margin Requirement. See also Margin Security.

Purchasing power is the number of goods/services that can be purchased with a unit of currency. 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 can be either a commodity money, like gold or silver, or fiat currency like US dollars. 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 money income stays the same, but the price level increases, the purchasing power of that income falls. Inflation does not always imply falling purchasing power of one's real income, since one's money income may rise faster than 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 value:

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

See also

• Group Purchasing Organization (GPO)
• Purchasing power parity
• Consumer Price Index
• Fair Trade
• Free Trade
• Group buy
• Collective buying power
• Constant Purchasing Power Accounting
• Oil burden
• Inflation

External links

• MeasuringWorth.com has a calculator with 7 different measures for bringing US $ values from the late 1700s up to any year until 2006. The Measures of Worth page discusses which would be the most appropriate for different things.
• Purchasing Power Calculator by Fiona Maclachlan, The Wolfram Demonstrations Project.

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