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 capacity) is the amount of goods and services that can be purchased with a given sum 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, companies and countries use their money to satisfy needs. The relationship between the price they pay and the amount of a given currency they possess corresponds to their purchasing power. That amount of money is conditioned by the exchange rate, for example, with respect to the dollar.
The purchasing power It is usually used to measure the level of wealth of a person or entity over a period of time. Purchasing power decreases as inflation and the cost of living increase, so it is directly related to the market's consumer price index (CPI).
Inflation and purchasing power
inflation It is an economic process of imbalance between supply (production) and demand (acquisition), which causes a generalized and growing increase in the price level in the market. A loss in the value of the currency is generated, that is, the money is worth less because the currency has lost its face value compared to other more solid currencies.
The types of inflation They can be:
- Latent or repressed It occurs when governments establish price controls, which prevents market indices from reflecting reality.
- Slow It occurs over a long period with a low and stable inflation rate, which allows for future projections.
- Hyperinflation It occurs when prices grow abruptly and constantly, causing uncertainty in the economy in the short term.
- Stagflation It occurs with a constant growth in prices along with a stagnation or decrease in the country's production.
During an inflationary process, the imbalance between the supply and demand of money It happens for two main reasons:
An excessive increase in the money supply:
It means that there is an overproduction of banknotes circulating in the market, whose total value exceeds their support in the reserves of the banking system. Money in itself is not synonymous with wealth, it is an exchange mechanism, therefore, the printing of a greater number of banknotes does not generate profits for the country. Wealth is the result of man's action on 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 a total face value of $1,000,000. If you print twice as many bills 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 flight of money in circulation. It can occur, for example, when citizens distrust their country's economy and decide to withdraw their savings from banks, or when investors distrust, close their companies and stop producing in the country (this generates unemployment and a decrease in production). local in the income of foreign currency).
Since money in itself is not synonymous with wealth, when it leaves circulation in the market it ceases to be an “active medium of exchange” that could generate greater production capacity.
An “inflationary cost spiral” is generated in which producers speculate (due to lack of confidence in the local economy) and increase prices, while workers' salaries remain the same. This causes the price of goods and services to increase but the amount of money circulating in the market to decrease.
Difference between salary and purchasing power
Salary and salary are remunerations that workers or professionals must receive from the employer, in exchange for their work or service. Although both terms are used synonymously, in accounting terms they have differences.
- Salary It is a sum of money that an employee receives in consideration for his or her 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 upon between the worker and the employer. Unlike the salary, the salary does not include discounts for holidays, licenses, vacations, etc.
The compensation an employee receives is determined by the supply and demand for that type of position, the level of training and experience required, among other factors. In countries with unstable economies, the agreed remuneration amount may be gradually increased to match inflationary increases.
When a sudden inflation or hyperinflation occurs wage increases are not sufficient to offset market increases. 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 earns the same amount of money or a little more, but he can buy less and less goods because that money has lost nominal value.
Example of purchasing power
An example of purchasing power is a person who has a monthly salary of $10,000 and spends about $3,000 per month on store products. 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 store products that they used to buy.
During those six months he continued to earn the same salary of $10,000, which means that Their purchasing power decreased because their salary did not increase at the rate of rising prices of the market. Earning the same amount of salary, the person now spends a greater percentage of his or her money to acquire the same amount of goods than before.
Minimum wage
The minimum wage It is the stipulated basic amount that any person must receive for performing a job during a full work day.
It must be sufficient for a formal worker to have purchasing power to be able to cover, on a monthly basis, his basic expenses and provide his family with the essential 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 aims to protect workers against the payment of extremely low salaries and guarantee a fairer distribution. Furthermore, the designation of a minimum wage must act as a complement to other social and employment policies, in order to be a possible way to overcome poverty.
References
- «Purchasing power» in Wikipedia
- “Minimum wages” on ILO.org
- “And why don't we just make more money?” at Gerencie.com
- «Salary and salary» on WebyEmpresas.com
- “Purchasing power” in EconomiaSimple.net
- “Inflation” in AuladeEconomia.com