- What is purchasing power?
- Inflation and purchasing power
- Difference between salary and purchasing power
- Purchasing power example
- minimum salary
We explain what purchasing power is, its relationship with inflation and salary. Also, examples and what is the minimum wage.
What is purchasing power?
Purchasing power (or purchasing power) is the quantity of goods and services that can be bought with a certain amount of money, depending on the type of currency and market prices.
The greater the amount of goods and services that can be purchased with that sum of money, the greater the purchasing power. This power has to do with the value of the currency and not with the number of bills.
Individuals, Business and countries use their money to satisfy needs. The relationship between the price they pay and the amount of a certain currency they own corresponds to their purchasing power. That amount of money is conditioned by the rate or exchange rate, for example, against the dollar.
Purchasing power is often used to measure the level of wealth of a person or entity over a period of time. weather. Purchasing power decreases with increasing inflation and cost life, so it is directly related to the consumer price index (CPI) of the market.
Inflation and purchasing power
Inflation is an economic process of disequilibrium between the offer (production) and demand (the acquisition), which causes a general and growing increase in the price level in the market. There is a loss in the value of the currency, that is, the money is worth less because the currency lost its face value against other, more solid currencies.
The types of inflation can be:
- Latent or repressed. It occurs when governments they establish price controls, which prevent market indices from reflecting reality.
- Slow. It occurs over a prolonged period with a low and stable inflation rate, which allows for future projections.
- Hyperinflation. It occurs when prices rise steadily and steadily, causing uncertainty in the economy short term.
- Stagflation. It occurs with a constant growth of prices together with a stagnation or decrease in the country's production.
During an inflationary process, the imbalance between the supply and demand of money occurs for two main reasons:
An excessive increase in the money supply:
It means that there is an overproduction of banknotes circulating in the market, the total value of which exceeds their support in the reserves of the banking system. Money in and of itself is not synonymous of wealth, it is an exchange mechanism, therefore, the printing of a greater quantity of banknotes does not generate profits for the country. Wealth is the result of the action of man Over the means of production, and a country that develops its productive capacity can generate greater Profits.
For example, if a country produces goods and services worth $ 1,000,000, it must print money with an endorsement or total face value of $ 1,000,000. If you print twice as many banknotes it means that those goods and services represent a total value of 2,000,000, that is, the currency was devalued and is now worth less than before instead of representing greater wealth.
A sudden decrease in the demand for money:
It means that there was a loss or leakage of money in circulation. It can occur, for example, when citizens distrust their country's economy and decide to extract their savings of the banks, or when investors distrust, close their companies and stop producing in the country (this generates unemployment and a decrease in local production in the income of foreign exchange).
Given that money in itself is not synonymous with wealth, when it leaves the market it is no longer an "active medium of exchange" that could generate greater production capacity.
An "inflationary cost spiral" is generated in which producers speculate (due to a lack of confidence in the local economy) and increase prices, while the wages of workers they stay the same. This causes the price of goods and services to increase but the amount of money circulating in the market is reduced.
Difference between salary and purchasing power
Wages and salaries are remunerations that workers or employees professionals must receive from the employer, in exchange for their work or service. Although both terms are used synonymously, from accounting they have differences.
- Salary. It is a sum of money that an employee receives in consideration for his services and is established based on a fixed amount that depends on the number of days worked during a period of time.
- Salary. It is a fixed remuneration for a particular job, previously agreed between the worker and the employer. Unlike the salary, the salary does not include discounts for holidays, licenses, vacations, etc.
The remuneration that an employee receives is determined by the supply and demand of that type of position, the level of training and the experience required, among other factors. In countries with unstable economies, the agreed amount of remuneration may be gradually increased to match inflationary increases.
When a sudden inflation or hyperinflation occurs, increases in wages are not enough to compensate for increases in the market. There is a loss of purchasing power, that is, the purchasing power that the individual has with that salary decreases.
In the concrete experience of the worker, this difference is perceived in that he receives the same amount of money or a little more, but each time he can buy less quantity of goods because that money lost nominal value.
Purchasing power example
An example of purchasing power is a person who has a monthly salary of $ 10,000 and spends about $ 3,000 per month on grocery items. Suddenly, there is a general increase in prices that grows month by month and, after 6 months, the person spends $ 5,000 to buy the same amount of warehouse products that they used to buy.
During those six months, he continued to earn the same salary of $ 10,000, which means that his purchasing power decreased because his salary did not increase at the rate of the rise in market prices. Receiving the same amount of salary, now the person spends a greater percentage of his money to acquire the same amount of goods than before.
minimum salary
The minimum wage is the stipulated basic amount that any person must receive for performing a job during a full working day.
It must be enough for a formal worker to have the purchasing power to be able to cover, on a monthly basis, their basic expenses and provide their family of the indispensable conditions for a dignified life. The minimum amount varies according to the legislation of each country and is susceptible to inflationary variations and the value of the local currency.
The fact of establishing a minimum wage has as objective protect workers against extremely low wages and ensure a fairer distribution. In addition, the designation of a minimum wage should act as a complement to other politics social and employment, in order to be a possible way to overcome the poverty.