Purchasing Power

1. The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase.

2. In investment terms, the dollar amount of credit available to a customer to buy additional securities against the existing marginable securities in the brokerage account.

Investopedia Commentary

1. To measure purchasing power, you'd compare against price index such as CPI. A simple way to think about purchasing power is to imagine if you made the same salary as your grandfather. Clearly you could survive on much less a few generations ago, however, because of inflation, you'd need a greater salary just to maintain the same quality of living.

2. Each jurisdiction has its own rules governing margin transactions. In the United States you can purchase up to 50% of securities on margin, so, if you had $10,000 in a margin account, you'd be able to purchase up to $20,000 worth of securities. Said another way, you have an extra $10,000 of purchasing power (buying power).

Related Links

All about Inflation Tutorial
The Forgotten Problem Of Inflation

See also: Bracket Creep, Inflation, Initial Margin, Maintenance Margin, Minimum Margin, Personal Income, Purchasing Power Parity (PPP)

purchasing power

1. Consumer ability to purchase goods and services. Increased purchasing power represents proportionately larger increases in income than increases in the cost of goods and services.

2. The ability to purchase goods and services with a fixed amount of money. Within this narrower application, purchasing power is inversely related to the consumer price index. Increased purchasing power is a signal that future increases in economic activity are likely.