Purchasing Power

Purchasing Power

Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Price increases purchasing power declines and vice versa.

Factors affecting Purchasing Power

1. Over population

The population growth rate in India is high as 1.7 per 1000. Large population leads to increasing demand, but supply was not equal to the demand. So, the normal price level will be going an higher. So it affect purchasing power, especially in rural population.

2. Increasing prices of essential goods

Even though there has been a constant growth in the GDP and growth opportunities in the Indian economy, there have been steady increase in the prices of essential goods. The continuous rise in the prices erodes the purchasing power and adversely affect the poor people.

3. Demand for goods

When demand for goods increases, the price of goods increases then the purchasing power is affected.

4. Price of goods affect the value of currency

When the price increases the purchasing power decreases and finally the value of currency decreases.

5. Production and supply of goods

The production and supply of goods decline, the price of goods increases, then the purchasing power is affected.

6. Poverty and inequality

There exists a huge economic disparity in the Indian economy. The proportion of income and assets owned by top 10% of Indian goes on increasing. This has led to an increase in the poverty level in the society. Generally purchasing power is affected by poverty and unequal distribution of wealth also

Purchasing Power Parity (PPP)

A concept related to purchasing power is purchasing price parity (PPP). PPP is an economic theory that estimates the amount that needs to be adjusted to the price of an item.

can be used to compare countries income levels and other relevant economic data concerning the cost of living, or possible rates of inflation and deflation. Recently, India became the third largest economy in terms of PPP. China became the largest economy, pushing the US to the second position.