The term “purchasing power” is connected to much more than the ability to buy products and services. It also refers to the value of money, or the credit available in an economy for spending. In instances where there are at least two economies, this can also be called an exchange rate. Purchasing power is calculated by determining how many items one can buy with a fixed dollar amount. Various factors affect the overall purchasing power economies and individuals.
1. Supply and Demand
Supply refers to the number of goods and services a company offers to consumers. Demand is the degree to which consumers want those goods and services. Supply increases when companies produce more than people buy. This usually drives the price down, increasing sales and consumer purchasing power. High demand, however, usually raises prices, decreasing purchasing power because people must spend more money to purchases the same number of goods or services.