Posted in Marketing and Strategy Terms, Total Reads: 406
Definition: Purchasing Power
The number of goods and services which can be purchased with any unit of currency is called as purchasing power. It is a very simple concept with many applications. The basic definition of purchasing power is how much of your money can buy you goods.
Purchasing power can be used to understand the time value of money. Due to inflation, the purchasing power of people has decreased globally. This means that to get the same amount of goods in 2015, you would need more money as compared to say, in 1960.
Purchasing power is also used to compare values in different currencies via a similar platform.
Any currency can be used as the common denominator, but to measure purchasing power, different currencies need to be compared with the same currency.
Example, if Jack has 500$ to purchase a painting and Santiago has 432.48€, then they both have 30810 Indian rupees of purchasing power.
Evaluation of Companies
Analysts look at the purchasing power of companies, when looking at a company’s merger and acquisition. It may include evaluations of its available credits, cash holdings, assets and potential to raise cash.
If the price of goods increases/decreases or if inflation increases/decreases purchasing power changes. A high real income means higher purchasing power as real income is adjusted for inflation.