Purchasing Power

The term “purchasing power” denotes a measurement of the value of a currency unit based on the goods and services which it can be traded for.

A currency’s full purchasing power is measured both by the goods and services which it can be traded for in its country of issue, and its value on an international level.

Inflation causes the purchasing power of a currency to decrease, meaning that each unit of currency purchases less goods and services than it did previously.

Deflation causes purchasing power to increase, meaning each unit of the currency in question can purchase more goods and services than it did previously.

The purchasing power of a currency is based largely on the liquidity of the currency – the ease with which that currency can be redeemed for goods and services.

Other factors, including decisions made by central banks or government monetary authorities, the size of the issuing country’s industry and economy, and the usefulness of the currency as a service all play a role in determining purchasing power.

Example:

If the annual rate of inflation is 10%, a product which costs CHF 10 at the beginning of the year would cost CHF 11 at the end of the year. That means that if you had CHF 1000 to spend on that item, that CHF 1000 would buy you 100 of those items at the beginning of the year but only 90.91 of them at the end of the year (CHF 1000 divided by 11). Your loss of purchasing power during that year would be around 9.09%.

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