Purchasing power of money
Also called: Value of money · Topic: Money: From Barter to Digital Currency · NCERT: Class 11, Ch 7 "Index Numbers"; Class 12, Ch 3 "Money and Banking"
Meaning
The purchasing power of money, also called the value of money, is the quantity of goods and services that one unit of money can buy. It is the opposite of prices:
Value of money = 1 / price
When the general price level rises (inflation), each rupee buys less. This is called a deterioration, or fall, in the purchasing power of money. It hurts savers and lenders most, because the rupees they get back later buy fewer goods.
Example
If a pencil costs ₹2 and a pen costs ₹10, then ₹1 buys 1 ÷ 2 = 0.5 pencil, or 1 ÷ 10 = 0.1 pen. If the pencil's price rises to ₹4, the same ₹1 buys only 0.25 pencil. The purchasing power of the rupee has halved.
Don't confuse with
- Money's worth: purchasing power is an objective measure that depends on prices. Money's worth is the personal value a buyer places on a good.
Related concepts
- Money
- Functions of money
- Medium of exchange
- Unit of account
- Store of value
- Standard of deferred payment
- Money's worth