Purchasing Power

Purchasing power is the value of money in terms of the quantity of goods or services that one unit of that money can buy. The value or purchasing power of a currency, like the U.S. dollar, can change over time.

For example, in the year 2015, Alice has $100 and wants to buy bottles of water that are $1 each. Alice can purchase 100 bottles of water in 2015. In the year 2024, the price of water bottles increased to $2. Now, Alice can only buy 50 bottles of water. The example shows that Alice’s $100 lost half of its purchasing power. This concept shows that rising prices, or inflation, decrease the purchasing power of your dollars.

There are several ways to measure the purchasing power of money, an example of this in the U.S. is the consumer price index also known as CPI.