Purchasing power is a subject that interests you? Are you curious to understand how the National Institute of Statistics and Economic Studies (Insee) calculates purchasing power? We are going to provide you with sufficient information for you to better understand this concept in general. Next, we will explain the calculation technique of the latter by INSEE.
What is purchasing power according to INSEE?
The purchasing power, is what an income allows us to obtain in terms of goods and services. Furthermore, purchasing power is dependent on income and prices of goods and services. The evolution of purchasing power occurs when there is a change between the level of household income and the prices of goods and services. Purchasing power increases if the same level of income allows us to buy more goods and services. If, on the contrary, the level of income allows us to obtain fewer things, then the purchasing power drops.
In order to better study the evolution of purchasing power, INSEE uses the system of consumption units (CU).
How is purchasing power calculated?
In order to calculate purchasing power, INSEE uses three data which will allow him to have information on the purchasing power:
- consumption units;
- disposable income;
- the evolution of prices.
How to calculate consumption units?
Consumption units in a household are calculated in very simple ways. This is a general rule of:
- count 1 CU for the first adult;
- count 0,5 UC for each person in the household over the age of 14;
- count 0,3 UC for each child in the household under the age of 14.
Let's take an example: a household made up ofa couple and a 3 year old child accounts for 1,8 UA. We count 1 UC for one person in the couple, 0,5 for the second person in the couple and 0,3 UC for the child.
disposable income
In order to calculate the purchasing power, it is necessary take into account the disposable income of the household. The latter concerns:
- income from work;
- passive income.
Income from work is simply wages, fees or income contractors. Passive income is dividends received through rental property, interest, etc.
Price developments
INSEE calculates consumer price index. The latter makes it possible to determine the evolution of the prices of goods and services purchased by households between two different periods. If prices go up, then it is inflation. The downward price trend also exists, and here we let's talk about deflation.
How does INSEE measure changes in purchasing power?
INSEE has defined the evolution of purchasing power in 4 different ways. She first defined the evolution of purchasing power as the evolution of household income at the national level, without taking inflation into account. This definition is not very correct since an increase in income at the national level can simply be due to the increase in population.
Then, INSEE redefined the evolution of purchasing power by the evolution of income per person. This second definition is more realistic than the first since the result is independent of population increase. However, calculating the evolution of purchasing power in this way does not allow to have a correct result, because several factors come into play and discredit the calculation. When a person lives alone, for example, they spend much more than if they lived with several people.
Otherwise, the consumption unit method has been established. It makes it possible to take into account the number of people in a household and solve the problem posed by the second definition.
The last definition concerns an adjusted income. Specialists have set up the latter in order to take into account the prices of goods and services purchased by a household, but not only, statisticians also include free drinks offered to a household such as in the health or education sector.
In 2022, purchasing power is declining. Although it mainly affects low-income households, this decline concerns all types of households.
