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Purchasing power
From Wikipedia, the free encyclopedia
In economics, purchasing power refers to the amount money — or, more generally, liquid assets — can buy. 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.
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 in the base year. The formula for purchasing power of a unit of money, say a dollar, relative to a standard price index P in a given year is 1/(P/100). So, by definition the purchasing power of a dollar decreases as the price level rises.
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