How to Determine Purchasing Power
The term "purchasing power" has long been a popular phrase used in financial discussions. Many people talk about the "declining purchasing power of the American dollar." What does that actually mean? Purchasing power is an actual term used in economics and it is defined as the numbers of goods that can be bought with one unit of currency. It also refers to a simple equation designed to calculate the time value of a certain amount of money based on future projected interest rates. This equation is actually simple to understand and easy to calculate.
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Instructions
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Find out what the Consumer Price Index is for the year you want to find out by going online to measuringworth.com/ppowerus.
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Divide the number 100 by the CPI. 100 represents a dollar in the base year (the current year).
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Write down the result. The resulting number represent the number of goods you could purchase with that dollar.
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Optionally, you can also use online calculators to compute purchasing power. Go to pine-grove.com/financial/inflation.htm and put in the amount of money you want to find the purchasing power of, and the number of years you would like to project that number to.
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Tips & Warnings
Understand that in investment, purchasing power has a slightly different meaning. It can refer to "the dollar amount of credit available to a customer to buy additional securities against the existing marginable securities in the brokerage account," according to investopedia.com This means that when stocks are bought on margin, only a certain percentage can be purchased in that way with the remainder having to go elsewhere.
