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What is Purchasing Power?
What is Purchasing Power?

The term "purchasing power" is connected to much more than the ability to buy products and services. It also refers to the value of money, or the credit available in an economy for spending. In instances where there are at least two economies, this can also be called an exchange rate. Purchasing power is calculated by determining how many items one can buy with a fixed dollar amount. Various factors affect the overall purchasing power economies and individuals.

01

Supply and Demand

supply and demand purchasing power

Supply refers to the number of goods and services a company offers to consumers. Demand is the degree to which consumers want those goods and services. Supply increases when companies produce more than people buy. This usually drives the price down, increasing sales and consumer purchasing power. High demand, however, usually raises prices, decreasing purchasing power because people must spend more money to purchases the same number of goods or services.

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02

Credit

credit purchasing power

When most people want to buy a big-ticket item like a car or large appliance, they often use credit because they do not have enough available cash. At the beginning of a credit situation, a consumer has a lot of purchasing or buying power. However, buying power decreases as a consumer continues to make purchases. There is a limit to how much you can spend on credit without becoming a huge financial risk. You must repay the creditor to increase purchasing power. Sometimes, your ability to continue to purchase on credit will depend on how faithfully and consistently you pay back the initial credit amount.

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03

Interest Rates

interest purchasing power

If you purchase goods or services on credit, you will almost always have to pay an interest rate. The amount of that interest rate will depend on your creditworthiness or your record of repayment. Before a company extends a line of credit, they will use your credit score and payment history to analyze your purchasing power. High-interest rates reduce your purchasing power because you are required to pay a lot of interest in addition to your credit amount. Low-interest rates give you more purchasing power, but you must maintain a good credit record.

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04

Inflation

inflation purchasing power

In a state of inflation, there is too much purchasing power for too few goods. A low supply of goods will drive prices up, which, over time, will minimize purchasing power. Inflation can also affect how much money you can save by reducing the interest you can earn or keeping you stuck in an investment opportunity where people are not purchasing. Inflation makes prices high and ruins consumer confidence, leading them to become more conservative buyers.

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05

Head of Household Age

household purchasing power

Age can be a telling factor when you examine spending and purchasing power. According to the U.S. Bureau of Labor Statistics, the Baby Boom generation has the power to influence the level of consumer spending for the entire nation. As you get older, though you may have more purchasing power based on retirement funds and pensions, you are likely spending less or spending in fixed amounts.

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06

Family Structure

family purchasing power

The family unit is a crucial consideration for determining purchasing power. From an early age, our families consciously and subconsciously plant values about money and spending. The idea of the traditional family has shifted significantly in the 21st century. However, the structure of your family is always at the core of your buying decisions and your ideas about your own purchasing power, long into adulthood. Your family's early influences determine how you build or fail to build, purchasing power in your own life.

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07

Housing Status

housing purchasing power

For most people, primary concerns about purchases are enmeshed with maintaining basic needs such as shelter, and as such, we don't think much about our purchasing power. Homeowners tend to be more conservative in their spending because the maintenance of their home is a financial priority. However, they also tend to have more purchasing power. If you do not own a home and are renting, you may have more confidence in making large or expensive purchases because you do not have a long-term financial burden. Your purchasing power will fluctuate based on what you currently desire and what your purchase goals are.

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08

Current Work Status

housing purchasing power

If you are a free spender, a favorable, secure work status may tempt you to take more financial risks and ultimately decrease your purchasing power. However, stable, steady employment gives you more confidence to make purchases on credit and more resources to repay low-interest amounts on time. You build an excellent credit record this way. Unstable work or unemployment can endanger purchasing power if it affects your ability to make recurring payments on time and maintain a good credit rating.

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09

Region

regional purchasing power

Living in an economically depressed city or state can affect your purchasing power, especially if you are purchasing locally. Depressed local economies usually do not offer too many incentives for spending, reasonable salaries that cover more than the cost of living or credit situations that help people build good credit histories with low interest. The economic stress in long-term and sustained. True buying power in these locations is difficult to build with so many factors working against it.

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