No matter what amount of money is in question, its real value tends to change over time. If you want to find out how it changes, then you need to try our purchasing power calculator (also known as buying power calculator). We have created this tool to help people realize how much their dollar is worth from year to year.
In addition to the calculator itself, you can also find out more about the real and nominal value of money, what the purchasing power is, and much more. Without further ado, let’s dig a bit deeper and reveal the important facts about buying power.
What Is Purchasing Power?
While there are different definitions of purchasing power, it comes down to the ability of consumers to buy goods and services. In fact, purchasing power is the ability of an individual or group to purchase a good or service. It is one of the most important factors in determining the standard of living. This factor includes what people can afford to buy, as well as what they need to buy.
Purchasing power has many different effects on people’s lives. It determines how much food they can eat, where they live, and how long they live. It varies by country and region because there are different costs for goods and services in each location. Purchasing power is affected by:
1) The price of the goods and services,
2) The income available to buy those goods and services, and
3) The cost of living in a particular area.
How the Purchasing Power of an Amount of Money Is Affected by Time
As stated above, the buying power of money is the relative ability of the given amount of money to purchase goods or services. The time factor plays a major role in the buying power of money. It is an important factor in determining the buying power of the money.
When a person has more time to spend, they have more purchasing power than if they had less time. The same principle applies to money. When someone has more savings, they have more purchasing power than someone who has less money and less time.
An amount of money from different years shouldn’t be taken when comparing real value. If you want to compare the actual value of your money in certain years, then you need to adjust the older value by a price index. That’s because you will not be able to purchase an identical quantity of products with an identical amount of bucks in various years.
Buying Power Calculator: How Does It Work?
Now that you have a better understanding of purchasing power, you need to familiarize yourself with our calculator and learn how it works. To help you get the hang of how the buying power calculator works, we will take an example.
Let’s say you want to buy a motorcycle that was priced at $900 in 1981. To calculate purchasing power, you need to consider how it changed from 1981 to 2022 (today). Actually, you need to know the worth of these 900 bucks in different years by using the following formula:
BP = Price in Reference year * (Price index in Target year / Price index in Reference Year)
- The price of the item (motorcycle) in the reference year (1981): $900
- Price index in target year: 281.93
- Price index in reference year: 90.9
Buying Power = 900 * (281.93 / 90.9) = 2,791
According to this formula, $900 from 1981 is $2,791 in 2022.
However, you should not only consider the nominal price but also how it relates to your income. Research shows that in 2022 the average wage is $53,490/year in the United States. By setting aside a smaller portion of your annual income, you can now afford a motorcycle that’s not comparable with the one from 1981. It is no doubt much better and more advanced.
FAQs
What Determines Buying Power?
Purchasing power is an economic term that refers to the ability of a person or group to buy goods and services. It is usually measured as the total amount of goods and services that can be purchased by a nation in a given year.
The purchasing power of consumers depends on their income, wealth, and preferences. If someone’s income is high, they will have more buying power than someone with a low income. Income is the amount of money a person earns in a year. It can be determined by many different factors, such as where they live, how old they are, and what kind of job they have.
Generally speaking, the more money a person makes, the more purchasing power they have. Wealthier people are also likely to have more buying power because they can afford to spend more money on different things such as expensive cars or vacations abroad.
Preferences also play a role in determining purchasing power because if someone prefers expensive clothing, then they will be able to spend more money on it than someone who doesn’t care about fashion at all.
How Can You Increase Your Purchasing Power?
You can increase your purchasing power by saving money. When it comes to buying a house, then you need to save more for both your closing costs and down payment. Anyway, saving money is key to increasing buying power.
It is a well-known fact that the more money you have, the easier it is to get more. Increasing your purchasing power is not only about having more money in your bank account but also about improving your credit score and getting better loans. That’s why you need to check your credit rating.
Besides, try to reduce your debt. If you want to increase your purchasing power, one of the best ways would be to pay off all of your debt. You will feel much better when you don’t have any debt hanging over your head and it will be easier for you to make big purchases without worrying about how long it will take for them to pay off.