Deane Bel E.
Tria l 12 ABM-A
APPLIED ECONOMICS : Lesson 1
Purchasing Power
PURCHASING POWER
✿ value of a currency expressed in terms
of amount of goods or services that one
unit of money can buy
✿ mostly collected by how many items a
buyer can buy with a fixed dollar
✿ highly relevant when measured for
changes over time
Negative impact to a country’s economy
when currency’s purchasing falls
✿ If the fall is caused by an excessive
inflation, cost of living rises because prices
of goods and services also rise
✿ When price rises, each peso buys fewer
goods and services
✿ Buyers pay MORE for goods and services
✿ Sellers receive more than what they sell
Purchasing Power Gain
✿ when there is an increase in the
purchasing power, consumers can buy
more goods and services with a given
amount of money
✿ Deflation and technology advancement
Purchasing Power Loss
✿ when there is an decrease in the
purchasing power, consumers can buy
less goods and services with a given
amount of money
✿ Natural or man-made disaster, inflation,
government regulation
Because of the implications of changes in
purchasing power to the consumers who
contribute a large chunk in the overall
economy, the government formulates rules
and regulations to safeguard purchasing
power and keep the economy healthy.
Consumer Price Index
✿ a traditional economic measure of
purchasing power.
✿ indicates a rise or fall in the price of four
hundred selected items ranging from
groceries to housing
✿ a small change in prices of commodities
listed in the CPI can show the best
estimate of consumer purchasing power
Purchasing Power Parity
✿ economic theory that determines the
amount needed to the price of an item,
given two exchange rates, to equal each
country’s purchasing power or currency
rates
EFFECTS OF CONTEMPORARY ISSUES ON
PURCHASING POWER
MIGRATION
✿ Process of moving from one country to
another which one is not a native for
permanent residence
✿ Highly skilled immigrants make the
receiving country better off because these
people bring diverse specialty and talents
✿ Low-Skilled immigrants fill in jobs in
which the natives are in short supply and
by extension allows native to be employed
in a higher skilled jobs.
✿ Low Skilled immigrants are said to
contribute to rising level of inequality and
poverty in the receiving country
EXCHANGE RATE
✿ One of the fundamental determinants of
an economy’s health aside from inflations
and interest rates
✿ Plays and important role in country’s
level of trade
✿Higher currency
= Expensive Exports, Cheaper Imports
✿Lower currency
= Expensive Imports, Cheaper Exports
✿ foreign investors seek countries with
strong economic health to invest in
✿ declining exchange rate decreases the
purchasing power of income and capital
gains derived from any returns
Deane Bel E. Tria l 12 ABM-A
APPLIED ECONOMICS : Lesson 1
Purchasing Power
OIL
✿ most traded commodity in the world,
significantly affects world economy
Demand for oil is inelastic which means
that a rise in price causes only a small fall
in demand.
– with an increase in oil price, producers
will have an increase in revenue, while
oil importers will see an increase in cost
of purchasing oil
– consumers are affected such thatthe
amount of oil purchase with the same
amount of money is now lesser
– a significant increase in oilprice may
lead to a higher inflation level. This is
because, with an increase in oil prices,
transportation costs of goods and services
also increases which in turn increases
their prices.

UNEMPLOYMENT
✿People who are jobless
✿Unemployment Rate : shows percentage
of people in the labor force who are jobless
✿ Strong Economy : Low UER
✿ Weak Economy : High UER
✿Unemployment causes a large but
short-lived drop in income. Since
purchasing power is a function of people’s
income
- Purchasing power of an
unemployed person decreases
- Consequently, spending declines
as there is nothing left to spend

PEACE AND ORDER

✿Businesses and industries are disrupted
when the country is in chaos. They cannot
operate properly because of high risks
associated
- Rebellion
- Political Chaos
- High Crime rate among others
✿Foreign investors will pull out and
transfer their investments to other
countries with stable economic situation
✿Without peace and order, decrease in
purchasing power
✿Prices of goods and services are
expected to rise
✿Ceteris paribus, people can buy less
goods and services than before.