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 goods and services for a certain amount of money 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 existing rate into different national currencies, in different world countries you can buy the same consumer basket, provided there are no transport restrictions and costs.
For example, if the same list of products costs 1000 rubles. in the Russian Federation and $ 70 in the USA, then paritypurchasing power will have a ratio of 1000/70=14.29 rubles. for 1$. This concept of forming 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, based on purchasing power parity, the real exchange rate can only be calculated conditionally, because there are still many factors that affect it.
Purchasing power of the population reflects the maximum amount of goods and paid services that the average consumer at his level of income has the ability 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 able to spend on purchases.
To determine the changes in the commodity volume that a consumer can buy for the same amount of money in the current year in relation to the year under study, the purchasing power index is used. It shows how the nominal and real wages of the population correlate with each other, and is the opposite of the commodity price index. 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 security of an individual consumer and the entire population of the country.
Whenpurchasing power increases greatly, this leads to deflation, and there is a shortage of goods in the state. In this situation, in order to balance the indicators, producers must either increase the volume of commodity production or increase the prices of products.
When purchasing power falls, it leads to inflation and negatively affects the economy of both an individual 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 economies 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.
