What Is Purchasing Power?

Purchasing power is the value of currency or money reflected in terms of the number of goods or benefits that one unit of currency or money can buy.

What does this look like in the real world?You're working 40 hours a week. Your honey bunches has the good seafood spread on the dinner table. Then the company you work for goes belly up. Suddenly hotdogs and cheese crackers grace your dinner table. Your paycheck is half of what it was as you work as a bartender to keep some money coming into the house. That's a loss of purchasing power. I pray you never see this scenario!

Of course, events could go in the opposite direction too.

Picture a teenager looking for his or her first car. This teen only has $1,500 saved from a part-time job. The choice of quality vehicles is going to be slim. One window may not open. The rearview mirror may be in the back seat. There may even be a smell of cigars from the previous owner. Now let's say dad remembers his first car and decides to match his teen's efforts with another $1,500. The teenager's purchasing power has doubled to $3,000. Fewer defects in the choice of car. A much cleaner ride. That's a gain in purchasing power.

These examples are meant as illustrations to help you see purchasing power in true-life situations.