Purchasing power is one of important economic indicators. And it is inversely proportional to quantity of that money which are necessary for purchase of goods and services from a consumer basket. That is purchasing power shows how many consumers at those prices which were established by the producer during this period of time can buy.
The parity of purchasing power represents a ratio of several various currencies, monetary units of the different countries. The parity is established on the relation of purchasing power to an identical set of a consumer basket. For example: if an identical set of products costs 225 hryvnias in Ukraine and 80 dollars in the USA, then the parity of purchasing power will be 225/8=2.9 hryvnias for 1 dollar. Such principle of installation of an exchange rate was developed in the 20th years of the 19th century. According to this concept if the exchange rate changed, then goods prices have to exchange in the same ratio. It is possible to define a monetary course by means of parity of purchasing power only conditionally because in reality there are a lot more factors which can influence an exchange rate.
Purchasing power of the population or, otherwise, solvency shows how many goods and services the population is capable to buy for that money that they have, at the same time considering the existing price level. That is purchasing power of the population directly depends on that part of income which people are ready and can allocate for purchases.
Index of purchasing power
For reflection of changes in the volume of goods and services which the population for the identical sum in the passing and investigated years can get use the index of purchasing power. This indicator reflects a ratio nominal and the real wage of the population. The index of purchasing power is size, the return to the price index for goods or tariffs.
To define purchasing power of money, use a formula: The design and estimate documentation =1/Its, where the design and estimate documentation – purchasing power of money; Its is the price index.
Thanks to calculations for the presented formula the determination of purchasing power comes down to simple actions. From a formula it is visible that it directly depends on welfare of the certain person, so, and reflects welfare of all people in the state. With a growth of purchasing power in the country there is a deficiency wave therefore producers for balance have to increase the outputs or raise the prices.
Decrease in purchasing power of monetary unit extremely negatively affects national economy generally, and then and world economy in general. There is it because such decrease by all means leads to inflation. And in the future and to full devaluation of monetary unit. So, for example, if it happens to dollar which is universal currency, then the world economy will very strongly suffer. There will be a decrease in purchasing power of unit because of price increase because then on the same monetary unit the consumer can buy smaller quantity of goods.
Every year in the developed countries researches on definition of statistics of inflation and the prices are conducted, it is made to have an opportunity in time and it is correct to react to possible critical situations. Providing statistics of the prices, the indicator of purchasing power of money is surely used.