Purchasing Power of Consumers

Description:

In economics, purchasing power refers to the amount money — or, more generally, liquid assets — can buy. As Adam Smith noted, having money gives one the ability to "command" others' labor, so purchasing power to some extent is power over other people, to the extent that they are willing to trade their labor or goods for money. The Purchasing power parity (PPP) theory was developed by Gustav Cassel in 1920. It is the method of using the long-run equilibrium exchange rate of two currencies to equalize the currencies' purchasing power. It is based on the law of one price, the idea that, in an efficient market, identical goods must have only one price.

For detailed Purchasing Power Parities (PPP) Statistics:

http://www.oecd.org/topicstatsportal/0,2647,en_2825_495691_1_1_1_1_1,00.html

Enablers:

1. Deflation

2. Decreased price level

3. Productivity growth

4. Migration of labor force to lower cost area

5. Strong currency

6. Sound market

Inhibitors:

1. Inflation

2. Increased price level

3. Scarce resource

4. High oil price

5. Unstable political situation

6. Unopened market

Paradigms:

Old: (Pre-Euro times) Trading within and with Europe is tedious and difficult. The purchasing power of individual nations differs greatly within Europe. Residents of countries with strong currencies such as the Netherlands, Sweden, Finland and England have high purchasing power and are able to spend on excess goods. Other European countries have lower wages, higher unemployment, and lower purchasing power.

New: (Post-Euro times) A stronger united Euro currency allowed nations within Europe to strive to adhere to Euro regulations, in order to become members. Higher employment followed, no loss on exchange rates, easier business with Euro-countries by the United States and the oriental business centers. More purchasing power in some nations, some years. More credit buys. Higher expenditure on goods.

Experts:

Irving Fisher (1867-1947), Mathematical Economist, USA

http://www.econlib.org/library/Enc/bios/Fisher.html

Timing:

1992: The establishment of European Union. This economic integration had accelerated convergence toward PPP within the euro area.

1999: The introduction of euro as EU’s new currency.

2015: Chinese consumer becomes one of the strong drivers of world economic growth.

Web Resources:

1. http://en.wikipedia.org/wiki/Purchasing_power

2. http://en.wikipedia.org/wiki/Euro#Economic_and_Monetary_Union

3. http://www.econlib.org/library/YPDBooks/Fisher/fshPPM.html