Purchasing Power and CPI | Calculator

Basket of Good refers to the total price of goods and service a person regularly purchases within a certain time frame

What is Purchasing Power?

Purchasing power refers to a family’s income or a currency’s ability to buy goods and services. A high purchasing power means that a household can purchase more goods and services while the inverse happens when a household has a low purchasing power.

There are some factors affecting purchasing power, like inflation, exchange rate, and changes in income.

Inflation usually erodes purchasing power as prices tend to go up over time. In extreme cases of hyperinflation, it eats away the value of the currency that is deemed worthless.

Exchange rates also play a role in purchasing power, especially in the context of international trade. If the value of a currency decreases relative to other currencies, the purchasing power of that currency may decline in the global market. This indirectly affects inflation rates within a country.

Changes in wages also affect purchasing power. A person with more disposable income would have the ability to purchase more goods than a person who lives within a minimum wage.

How to Compute Purchasing Power?

You can get purchasing power by first getting the Consumer Price Index. To get the CPI you need to compare the current prices of the good to their previous prices.

To get the CPi we need to use this formula:
CPI = (Current Year Total Wieghted Price / Previous Year Total Weight Price) * 100

To compute for inflation rate you need this formula:
Inflation rate = (( Current CPI – Previous Year CPI) / Previous Year CPI) * 100

The formula for Purchasing power is:
Purchasing Power = ( CPI from a previous year / Current CPI) * 100