Purchasing power (solvency) is one of the most important economic indicators. It is inversely proportional to the amount of money needed to purchase various goods and services. In other words, purchasing power shows how much the average consumer can buy for a certain amount of money of goods and services at the current price level.
Purchasing power parity is the ratio between two or more monetary units of different currencies, which reflects their purchasing power in relation to a fixed list of goods and services. According to the theory, for a certain amount of funds, converted at the current exchange rate to different national currencies, in different world countries you can buy the same
consumer basket, provided there are no transportation restrictions and costs.
For example, if the same list of products costs 1000 rubles. in Russia and $ 70 in the USA, then purchasing power parity will have a ratio of 1000/70 = 14.29 rubles. for $ 1. This concept of the formation of exchange rates was adopted in the 19th century. According to this principle, a change in the exchange rate entails an automatic change in commodity prices in the same ratio. However, on the basis of
purchasing power parity, the real money rate can only be calculated conditionally, because there are still many factors influencing it.
The purchasing power of the population reflects the maximum number of goods and paid services that the average consumer at his income level has the opportunity to purchase for his available funds at the current price level. This indicator directly depends on the share of the population’s income that it is ready and can spend on shopping.
To determine the changes in the commodity volume that a consumer can buy for the same amount of money in the current year relative to the study year, the purchasing power index is used. It shows how the nominal and real wages of the population are related, and is the opposite of the index of commodity prices.
Purchasing power of money =
1 / price index. This formula allows you to quickly and easily determine the level of purchasing power and shows that it directly depends on the level of well-being and well-being of an individual consumer and the entire population of the country.
When purchasing power increases greatly, this leads to deflation, and the state has a
shortage of goods. In this situation, in order to balance the indicators, manufacturers must either increase the volume of commodity production or raise prices for products.
When purchasing power falls, it leads to inflation and negatively affects the economy of both a single state and the whole world. In the future, this trend may lead to a complete depreciation of the national currency. Also, the US dollar, which is the world currency, is not immune from this. If this happens, the economy of almost all countries of the world will suffer, since almost all processes in the global financial and economic sphere are tied to the US dollar.