Purchasing Power- the amount of value of a good/services compared to the amount paid. As Adam Smith noted, having money gives one the ability to "command" others' labor, so purchasing power to some extent is power over other people, to the extent that they are willing to trade their labor or goods for money. Adam Smith FRSE (baptised June 5, 1723 O.S. / June 16 N.S. – July 17, 1790) was a Scottish moral philosopher and a pioneering political economist. ... For other uses, see Money (disambiguation). ...

If money income stays the same, but the price level increases, the purchasing power of that income falls. Inflation does not always imply falling purchasing power of one's real income, since one's money income may rise faster than inflation. The price level is a measurement of the average level of prices in an economy. ... Real income is the income of individuals or nations after adjusting for inflation. ...

For a price index, its value in the base year is usually normalized to a value of 100 in the base year. The formula for purchasing power of a unit of money, say a dollar, relative to a standard price index P in a given year is 1/(P/100). So, by definition the purchasing power of a dollar decreases as the price level rises. This article does not cite its references or sources. ...

Historical Purchasing Power of US Dollar

Image File history File links Size of this preview: 488 × 600 pixelsFull resolution (555 × 682 pixel, file size: 31 KB, MIME type: image/gif)Historical purchasing power of US Dollar, relative to current purchasing power. ...

Allocation of goods by purchasing power

Relative purchasing power is the basis of the market allocation of goods underlying Capitalism. This should be contrasted with possible non-market allocation mechanisms such as rationing, needs-based allocation, or corrupt favouritism (cronyism and no-bid contracts). Image File history File links Unbalanced_scales. ... Capitalism generally refers to an economic system in which the means of production are all or mostly privately[1][2] owned and operated for profit, and in which investments, distribution, income, production and pricing of goods and services are determined through the operation of a free market. ... Rationing is the controlled distribution of resources and scarce goods or services: it restricts how much people are allowed to buy or consume. ... , the information in this article describes the current English public health service. ... “Crony” redirects here. ... This article or section does not adequately cite its references or sources. ...

As an example suppose a country produces enough food to supply 3200 kcal/day per person (the per capita energy intake needed to avoid malnutrition is about 2500 kcal/day), and the upper, middle and lower classes comprise 5%, 15% and 80% of the population with per capita relative food purchasing powers of 10, 2 and 1 respectively. If the government decides to allow market forces to control distribution, the resulting allocation will be:

Where the upper class would tend to consume higher-quality or luxury items (which use more resources and displaces other agriculture) rather than much larger amounts of staple foods. With a deficit of 500 kcal/day the lower class would be very malnourished, with starvation common. Even though the country has the potential to feed itself it will suffer a Malthusian crisis, inter-ethnic violence or even civil war unless the government or relief agencies intervene; however government intervention beyond minor post-disaster palliatives would "violate the free market" and might be forbidden by the IMF or the indigenous elite. The flag of the International Monetary Fund (IMF) The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring foreign exchange rates and balance of payments, as well as offering technical and financial assistance when asked. ...

In the modern world this self-contained scenario is rarer since most economies are part of a wider international trading network. This brings even larger purchasing power inequalities into the (enlarged) marketplace and without protectionist measures the country may end up exporting cash crops while even the former middle class become malnourished. Because of these disastrous outcomes, even governments promoting the most radical free market policies implement agricultural or price subsidies or controls, or other socialist measures, for critical goods and services. Protectionism is the economic policy of promoting favored domestic industries through the use of high tariffs and other regulations to discourage imports. ... In agriculture, a cash crop is a crop which is sold for money. ... A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy...

See also

• Purchasing power parity
• Consumer Price Index
• Fair Trade
• Free Trade