Le purchasing power represents the set of goods and other market services that an income can have. In other words, purchasing power is the ability of income to make purchases at different prices. A country with a increased purchasing power naturally contributes to country development. As a result, the greater the gap between income and the price of market services, the greater the purchasing power becomes. In 2021, Germany, for example, is ranked first country with the best purchasing power.
In this article, we give you ideas for properly calculate purchasing power.
How is purchasing power calculated?
The evolution of purchasing power arises with the gap between the level of household income and the level of prices. Indeed, when there is an increase in income compared to that of prices available on the market, purchasing power increases. Otherwise, purchasing power decreases when household income is lower than the price of market services.
To measure theconsumption unit, certain indices are taken into consideration:
- the first adult is calculated by 1 CU;
- an additional person over the age of 14 is calculated by 0,5 CU;
- a child who does not exceed 14 years is calculated by 0,3 UC.
If we take these units into account, we calculate theconsumption unit of a family consisting of two adults (a couple), a 16-year-old person (a teenager) and a 10-year-old person (a child), we find 2,3 CU (1 CU for the first parent , 0,5 UC for the second person (adult), 0,5 UC for the teenager and 0,3 UC for the person who does not exceed 14 years).
How to measure income to find purchasing power?
For measure purchasing power households, it is essential to take into account the income of each. Indeed, you take into account all earned income, in particular those which are increased with social offers and also reduced with the various taxes.
Moreover, business income consist of:
- labor income (salaries of employees, various fees for independent professions, income of merchants, artists and entrepreneurs);
- income from personal property (rent received, dividends, interest, etc.).
The evolution of prices in purchasing power
The price index which is used to measure the purchasing power of households at the national level, represents the index of household consumption expenditure. There is a difference between this index and the consumer price index (CPI). It takes into account changes in all prices corresponding to household needs (CPI). However, it does not give the same weight all the time.
In some cases, it uses a much higher weight to rents than the CPI (even more than double). In other words, in national accounts, we find that owner households can consume the price of a dwelling, as is the case of renter households.
What formulas should be used to calculate purchasing power?
There are two formulas to measure the purchasing power of a household. You can use the following methods:
- dividing labor income or wages by the price multiplier;
- divide the same income by the price index and multiply everything by 100.
Therefore, the household purchasing power with a salary of 1 euros is 320 euros, and that, if we divide this income by 1245,28 (the price index in 106) and the whole multiplied by 2015.
What criteria should be taken into account to calculate purchasing power?
Le calculation of arbitrable purchasing power is made from the arbitrable income. Indeed, the income obtained after having deducted the other pre-committed expenses, those which are essential for each household in the short term like the price of rent or that of insurance.
Le gross disposable income represents household income that is used to consume or invest following redistribution operations, such as social benefits and taxes.
Moreover, it is final consumption expenditure, plus the amount of arbitrable purchasing power and that of gross disposable income that have similar trends.
