In the traditional economic context, purchasing power refers to the amount of goods or services that a single unit of currency can buy. That is, how far your dollar can take you. It takes into consideration the effects of inflation, government regulations, and significant events on the amount of goods or services each of your dollars can buy. It may also take into consideration any deflation and innovation, which can increase your purchasing power.
An easy way to conceptualize purchasing power is to contrast the amount a dollar can buy today vs. the amount a dollar could have bought you in 1950. In 1950, the cost of a Coca-Cola was seven cents, meaning you could buy fourteen bottles of Coca-Cola with one dollar. Today, you may not even be able to buy a single bottle of Coca-Cola for one dollar, depending on where you live. In large part, this is due to the effects of inflation on your purchasing power over time and the rising cost of goods. In a nutshell, you would need a much larger income today to maintain the same quality of life that your parents or grandparents had in the 50’s.
One way to track your purchasing power is with the Consumer Price Index. This index averages price changes in critical consumer goods and services, making it a good tool for measuring changes in the cost of living and consumer purchasing power over time.