Purchasing power is defined as the value of the currency. It is described as the number of services or goods that one unit of the currency can buy. It is an indicator of the present market conditions because it enables a person or a business entity to know the amount the unit of reducing will be able to purchase.
Meaning of purchasing power
Purchasing power is described as the ability of a single or a group of economic factors that can easily influence the prices in the market. The purchasing power has a direct and indirect impact on the
- Consumer spending
- The economic growth of the country
- Investment or financial decision-making
- Consumer choices
- Lending rates
- Asset allocation
- Stock prices
- Securities values
The purchasing power always takes into account the inflation rate. When the purchasing power decreases, the cost of services and goods, one unit of currency can purchase increases. Increases increase in the cost of living and reducing consumer borrowing and spending. A decrease in purchasing power will signify the growth in the economy and vice-versa.
Factors influencing purchasing power
Purchasing power is considered an economic theory and can be measured by calculating the number of items a consumer can purchase with one fixed unit. Economists and government agencies keep track on the purchasing power of the consumer because it has an impact on the overall economy of a company. The factors that influence the purchasing power are as follows-
1. Supply and demand
The supply and demand theory refers to the supply of services and goods from different companies against the demand for those services and goods from the consumers. If the companies start producing more goods than the actual demand indicates it will result in a reduction in product prices. This is so because the companies will try to recapture its production costs by offloading unsold inventory.
The low prices are an indicator of high purchasing power. The high demand for goods and services is the result of less supply. It means higher prices and lower purchasing power of a consumer
2. Interest and credit rates
When a consumer does not have the required cash in hand, he opts for credit purchase. Although it is possible to buy more than your means through credit, it also has some repercussions because the consumer will have to pay their creditors even if their available credit has decreased.
This means that although the purchasing power of a consumer has increased for a temporary period in the long-term, it has reduced considerably.
One of the standards and constant factors in purchasing power is inflation. It is about too much money when there are too few goods. It results in reduced purchasing power and increased consumer prices over a specific period.
An example of inflation is that a few years back it was possible to watch a cricket match with a ticket of Rs 100 but in recent days the same ticket costs Rs 500.
4. Tax rates
Taxes can lower the real income of the consumer and this is why higher rates of taxes result in decreasing the purchasing power of an individual. When the government levies taxes it leaves the consumer will less amount of money and they can afford fewer goods and services.
It lowers consumer spending and slows down the economic growth of that nation
5. Exchange rates
Traveling to a place where the exchange rate will facilitate high purchasing power per unit will result in a cost-effective trip. Suppose a person from India visits Nepal or Bangladesh. He will have more purchasing power in both the countries as their exchange rate will favor Indian rupees over their currency.