What is Purchasing Power?
Purchasing power is the ability of consumers to purchase goods and services with a specific amount of currency or credit. The more goods and services that can be purchased with the same amount of money in any form, the higher the purchasing power of the individual, business, or other entity. Attempting to maximize this buying power is a common goal for just about any entity, from individuals who are attempting to organize a household budget to best effect to large multinational corporations that are seeking to maximize the returns on the proper use of their resources.
One of the easiest ways to understand this process is to consider its role in the operation of a household. With a specific amount of income to pay for all the monthly expenses associated with the home, a consumer will take steps to acquire the most goods and services necessary for successfully operating the home, while spending as little of the available income as possible. For example, the person may choose to purchase food products that are on sale rather than those currently sold at regular prices, making it possible to buy more food without spending any more money. As a result, he or she is able to prepare more meals at home for the same expense, making it possible to gain additional benefit from the resources on hand.
Businesses employ the same approach to cultivating as much purchasing power as possible. This often takes the form of seeking discounts on volume purchases of goods and services, effectively allowing the corporation to acquire more of what it needs to operate without spending any additional money. Doing so reduces operation expenses, makes it possible to produce products for sale at a lower cost, and ultimately increases the profit margin for the business. If a company finds that it cannot buy additional goods and services without spending more money, the purchasing ability of the business is considered diminished, and will eventually result in lower profits for the operation.
Investors also employ the concept when engaged in the task of securities trading. The idea is to use available credit, such as a margin account, to secure stocks and other securities that have the potential to earn a higher return, maximizing the profits that are earned from the investment. This approach allows investors to make the most of the credit limits assigned to margin accounts issued and maintained by brokerages, while avoiding the necessity to tie up more of their own resources to achieve the same results.
Ultimately, purchasing power is all about receiving the most benefit without incurring any additional expense. As a budgeting tool, assessing buying power is essential in just about any situation. Maximizing the satisfaction generated by acquiring more without spending additional money places the consumer in a more favorable financial position and frees other resources for use in different areas. Finding ways to manage this task remains a constant effort of most individuals and companies, and goes a long way toward inspiring competition among providers of different goods and services.
@Sunshine31 -I agree and I have to say that the purchasing power also increases when the availability of jobs increase. When more people are working our purchasing power goes up because people have disposable income to spend.
For example, China’s purchasing power is great because not only is the country almost at full employment but they have very little debt and have one of the largest populations in the world. Our GDP purchasing power has fallen a bit because of our increased debt.
It is almost like having your credit cards maxed out. You can’t charge anymore until you pay down your balance. I also heard that the economy in India is improving so much so that India’s purchasing power has allowed for new products to be tested in their market. They recently tested a small car that retailed for $3,000 that is revolutionizing the Indian economy because the Indian people have more disposible income to spend than ever before.
I think that when we start to see economic growth in the United States by the increase in available jobs, our purchasing power as a nation will be back to normal levels. We just have to keep an eye on the spending levels.
I just wanted to say that the purchasing power risk increases with the threat of inflation. Inflation really limits what we can actually purchase because our money will only go so far. With higher prices we have to pick and choose which goods and services that we would buy at the expense of other things that we may have purchased in the past.
For example, with the gas prices at $4.00 a gallon, many people find this expense critical and will forgo going on vacation or visiting a restaurant in order to offset the expense of the higher priced gasoline. Some change their behavior altogether and may decide to consume less gasoline and car pool or take public transportation as another result in order to save money for other things that are more critical.
This trend happened a few years ago and the price of gasoline fell back down to normal levels which increased the purchasing power by definition because of the reduced demand for the product allowed people to buy more of it for less money.
Post your comments