Question

The cost of the average consumer's basket of goods and services in 2018 is roughly 10 times what it was in 1950. In other words, what the average consumer bought for $100 in 1950 would cost a consumer $1,000 in 2018. Does this mean that the purchasing power of the average consumer is one-tenth what it was in 1950? Explain your reasoning.

Answer 1

The cost of the average consumer's basket of goods and services in 2018 is roughly 10 times what it was in 1950. This, however, does not mean that the purchasing power of the consumers have also increased in the same rate.
That is because, over the years the price level of the economy has also increased as a result of an increasing demand. This has led to inflation in the economy. With an increase in inflation rate, the purchasing power of the consumers decline. For instance, the value of goods which the consumers bought for $100 in 1950 might be equal to the value of goods which consumers bought for $1000 in 2018.