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, the purchasing power shows how much the average consumer can buy a certain amount of money for goods and services at the existing price level.
Purchasing power parity is the ratio between two or more monetary units of different currencies, which reflects their purchasing power with respect to a fixed list of goods and services. According to the theory, for a certain amount of money, recalculated at the existing rate in different national currencies, in different world countries one can buy the same consumer basket, provided there are no transport restrictions and expenses.
For example, if the same list of products costs 1000 rubles. In the Russian Federation and $ 70 in the US, then the parity of purchasing power will have a ratio of 1000/70 = 14.29 rubles. For 1 $. This concept of the formation of exchange rates was adopted in the 19th century. According to this principle, the change in the exchange rate entails an automatic change in commodity prices in the same ratio. However, on the basis of purchasing power parity, the real exchange rate of money can only be calculated conditionally, because there are still many factors affecting it.
The purchasing power of the population reflects the maximum quantity of goods and paid services, which the average consumer, at his income level, has the opportunity to purchase for the money at his disposal at the existing price level. This indicator directly depends on the share of income of the population, which it is ready and can spend on purchases.
To determine the changes in the volume of goods that a consumer can buy for the same amount of money in the current year in relation to the analyzed year, the purchasing power index is used. It shows how the nominal and real wages of the population are correlated, and is the opposite of the index of commodity prices. 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 the security of an individual consumer and the entire population of the country.
When purchasing power is greatly increased, it leads to deflation, and the state has a commodity deficit. In this situation, in order to balance the indicators, producers must either increase the volume of commodity production, or raise the prices for products.
When purchasing power falls, it leads to inflation and adversely affects the economy as a separate state, and the world. In the long term, this trend may lead to a complete depreciation of the national currency. Also, the US dollar, which is a world currency, is also immune from this. If this happens, then the economy 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.