Question

Many people confuse purchasing power of a money with inflation. What is the difference between the two concepts? Give example for the both.

Answer 1

Introduction:

Purchasing Power of money:

Purchasing power of money expresses value of money or currency in terms of goods and services. It explains what amount of quantity of goods and services a person can buy in exchange of specific currency. If Purchasing power of money or currency increases means that currency is becoming strong or more valuable and vice versa.

Inflation:

Inflation is the term which explains general rise in price of goods and services in specific economy. Inflation is shown in percentage. Major factors affecting inflation are demand and supply in any economy. So in simple words inflation is a rate which shows increase in prices in any economy for goods and services. It has huge impact on economy and financial condition of any country.

Example:

Purchasing power of money:

Say for example you have $1 and you can buy 4 apples with that money. Which shows purchasing power of $1. Here your money have power to buy 4 apples.

Inflation:

As we have seen in above example, price of 4 apple is 1$ means price per apple is 0.25$ (1$ / 4) now due to any reason, let’s say supply. Supply of apples decreases for some reason in the country, now price of apple goes double. Now one can buy apple at the rate of 0.50 $ each which is called inflation.

Difference between purchasing power of money and inflation:

There is opposite relationship between purchasing power of money and inflation. If inflation rate increases prices of goods and services also increases so, person cannot buy same quantity of goods and services by spending exact same amount as before and vice versa.

As we seen in example if inflation goes up purchasing power decreases. Before you were able to buy 4 apples from 1$ but now after inflation rate increases you are able to buy 2 apples form 1$. Here purchasing power goes down as inflation rate increases, prices of apple increases.

Conclusion:

From above explanation we can understand that purchasing power of money and inflation are not the same but inter-related.

This given examples are very basic just to understand this both concepts but in real word this happens on very vast forms and affects the whole nation or whole economy very strongly.