Purchasing Power of Money: Definition and Calculation

Purchasing power of money refers to the amount of goods and services that can be purchased with a unit of currency. It is an important economic concept that helps measure the value of money over time. The purchasing power of money can be calculated using the reciprocal of price index number.

Reciprocal of Price Index Number

The price index number measures the average level of prices of goods and services in an economy over time. The most common price index number used is the Consumer Price Index (CPI), which measures the changes in the prices of a basket of goods and services consumed by households. The CPI is calculated by dividing the cost of the basket of goods and services in a given year by the cost of the same basket in a base year and multiplying by 100.

The reciprocal of the price index number is simply the inverse or opposite of the price index number. It is calculated by dividing 1 by the price index number. For example, if the CPI is 150, the reciprocal of the CPI would be 1/1.50 or 0.67.

The purchasing power of money can be calculated by multiplying the amount of money by the reciprocal of the price index number. For example, if a person has $100 and the CPI is 150, the person’s purchasing power would be $100 x 0.67 = $67. This means that the person can only purchase goods and services worth $67 in the current year with the same amount of money that could purchase goods and services worth $100 in the base year.

Conclusion

In conclusion, the purchasing power of money is an important economic concept that helps measure the value of money over time. It is calculated using the reciprocal of the price index number, which measures the average level of prices of goods and services in an economy over time. The higher the price index number, the lower the purchasing power of money, and vice versa.

It is only reciprocal