Purchasing Power

Purchasing Power

By comparing disposable income with the level of prices, purchasing power measures how much people can afford to buy from their income.

Purchasing power indicates the quantity of goods and services that can be purchased with a certain amount of money. To measure it, disposable income must first be calculated. This is: gross income minus taxes and social security contributions plus benefits such as child allowances and pensions. How much this disposable income is then ultimately worth depends on the level of prices: for the same income inflation reduces purchasing power while deflation increases it.

The measure of ‘minutes of purchasing power’ includes pay per time worked instead of the disposable income. If net pay rises faster than inflation, one can buy more with a minute of work than before. For example, in 1960 you would have had to work for an average of half an hour to buy a kilo of sugar, whereas today it would take you less than 5 minutes.

Price levels vary not only over the course of time, but also by region. The higher cost of living in the big cities means that a much higher proportion of their population is at risk of purchasing power poverty than in rural areas. Despite this, purchasing power has played hardly any role in the discussion of income poverty.

Judith Niehues

Dr. Judith Niehues

Head of the Research Group Microdata and Method Development

Tel+49 221 4981-768

Mailniehues@iwkoeln.de

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Christoph Schröder

Christoph Schröder

Senior Researcher für Einkommenspolitik, Arbeitszeiten und -kosten

Tel+49 221 4981-773

Mailschroeder.christoph@iwkoeln.de

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Maximilian Stockhausen

Dr. Maximilian Stockhausen

Economist for Income and Wealth Distribution

Tel+49 221 4981-862

Mailstockhausen@iwkoeln.de

@StockhausenEcon

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