What is purchasing power?

Purchasing power is “the value of a currency expressed in terms of the amount of goods or services
that one unit of money can buy1.”  To put it simply, it is mostly calculated by how many items a
buyer can buy with a fixed dollar. Purchasing power is highly relevant when measured for changes
over time. For example, when a dollar could buy three avocados a decade ago, now a dollar can buy
only two, then purchasing power has decreased over time.  Purchasing power affects worldwide
economy, from consumers who buys goods and services and to different investors. When a
currency’s purchasing power falls, there is a negative impact to a country’s economy such that if the
fall is caused by an excessive inflation, cost of living rises because prices of goods and services also
rise. When price rises, each peso buys fewer goods and services. Buyers pay more for goods and
services and sellers receive more than what they sell.

When there is an increase in the purchasing power, consumers can buy more goods and services with
a given amount of money. This is calledpurchasing power gain. When there is a decrease in the
purchasing power, consumers can buy lesser goods and services with a given amount of money. This
is called purchasing power loss.Deflation and technology advancement cause purchasing power
gain, while natural or manmade disasters, inflation, government regulation, etc. cause purchasing
power loss. Because of the implications of changes in purchasing power to the consumers who
contribute a large chunk in the overall economy, the government formulates rules and regulations to
safeguard purchasing power and to keep economy healthy.

Consumer Price Index (CPI) is a traditional economic measure of purchasing power. To compare

Purchasing power parity (PPP) is an economic theory that determines the amount needed to the
price of an item, given two exchange rates, to equal each country’s purchasing power or currency
rates.

Effects of Contemporary Issues on Purchasing Power

Migration

 
Migration is the process of moving from one country to another of “which one is not a native for
permanent residence[3].” From the rising influx of immigrants from war affected countries, to rising
ageing population, and to increasing political rhetoric on anti-immigration, migration has currently
been a hot issue in Europe and U.S. Amidst the concerns, research shows that there is a positive net
economic benefit to the receiving country and sending country. Highly-skilled immigrants make the
receiving country better off because these people bring diverse specialty and talents while low-skilled
immigrants fill in jobs in which the natives are in short supply and by extension, allows native to be
employed in a higher-skilled jobs. On the opposite side, low skilled immigrants are said to contribute
to rising level of inequality and poverty in the receiving country. [4] Also a study of Norway
immigrants identify a negative effect on productivity that may be a worry for long-term
growth.”[5] bruel .org for further data.

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Fluctuations in the exchange rate

Exchange rate is one of the fundamental determinants of an economy’s health aside from inflation
and interest rates. This also plays an important role in the country’s level of trade which is essential
in a free market. A higher currency makes a country’s exports more expensive and imports cheaper.
A lower higher currency makes a country’s exports cheaper and imports more expensive.

Foreign investors seek countries with strong economic health to invest in.  Political chaos, however,
drives away investors as it increases economic risk. “A declining exchange rate obviously decreases
the purchasing power of income and capital gains derived from any returns.”[6]

Oil price increases

Oil, the most traded commodity in the world, significantly affects world economy. Demand for oil is
inelastic which means that a rise in price causes only a small fall in demand. Demand is inelastic
because consumers highly need oil products (e.g. car runs on oil). With an increase in oil price,
producers will have an increase in revenue, while oil importers will see an increase in cost of
purchasing oil. [7] By extension, consumers are affected such that the amount of oil purchase with the
same amount of money is now lesser. Moreover, a significant increase in oil price may lead to a
higher inflation level. This is because, with an increase in oil prices, transportation costs of goods and
services also increases which in turn increases their prices.

Unemployment

People who are jobless and who continuously look for work yet found nothing are considered
unemployed. Unemployment rate shows the percentage of people in the labor force who are
jobless. [8] When an economy is strong, the unemployment rate is expected to fall; however, when the
economy is weak and job are scarce, the unemployment rate is expected to rise. “Unemployment
causes a large but short-lived drop in income.” [9] Since purchasing power is a function of people’s
income, an unemployed person’s purchasing power decreases. And consequently, spending declines
as there is nothing left to spend.

Peace and order

Businesses and industries are disrupted when the country is in chaos. The country is not in peace and
order when there is a rebellion, political chaos, and high crime rate among others. Business and
industries cannot operate properly because of the high risks associated. Additionally, foreign
investors will pull out and transfer their investments to other countries with stable political and
economic situation; thereby, situating the country in a difficult situation. Without peace and order,
the country’s currency is expected to fall against other countries’; hence, decreasing the purchasing
power of people. When a country’s exchange rate fluctuates, consumers’ buying power decreases
relative to other countries. A peso in this instance will buy fewer goods and services than before.
Also, prices of goods and services are expected to rise. Ceteris paribus, people can buy less goods
and services than before.