Purchasing Power
Candlefocus EditorThe purchasing power of a currency is concerned with how much it will buy in terms of goods and services. As a result, purchasing power is inversely related to inflation, as a currency with higher inflation will be worth less when buying goods and services. Inflation is a rise in the general level of prices and tends to erode the purchasing power of a currency over time. Consequently, Central Banks attempt to control inflation by adjusting interest rates which keeps prices stable and thus maintains purchasing power.
In the United States, the Consumer Price Index or CPI is used as a measure of purchasing power. The CPI compares the price of a fixed basket of goods and services from year to year and is used to track inflation changes.
The strengthening of international links over the past few decades due to globalization has established a deep interdependence between countries. This has resulted in currencies being linked more closely than ever before. Protecting the purchasing power of a currency is now essential for the maintenance of global economic stability.
In conclusion, purchasing power is an important factor in maintaining the economic health of a country as it directly affects the amount of goods and services that a currency can buy. Central banks make adjustments to interest rates to achieve a balance between prices and purchasing power, while in the US the Consumer Price Index is used as one measure of purchasing power. Finally, globalization has resulted in the need to protect purchasing power worldwide as off-setting economic instability any one country could have global repercussions.