What Is Purchasing Power| How It decreases With Inflation

Summary

This video explains the concept of purchasing power, which is the ability to buy goods and services. It decreases over time due to inflation, causing money to lose value. For instance, a person with savings of 100 rupees might find that the same amount won't buy the same goods after a year due to a 6-7% inflation rate. To combat this, investing in assets that yield returns above inflation is advised to maintain purchasing power. The video concludes with an invitation to subscribe for more informative content.

Takeaways

• 💡 Purchasing power refers to the ability to buy goods and services with money.
• 📉 The purchasing power decreases over time due to inflation, which devalues currency.
• 💸 Inflation rates can lead to a loss in purchasing power, as the same amount of money buys less over time.
• 💼 A person with savings of 100 rupees may find that their purchasing power has decreased by 6-7% after one year due to inflation.
• 🛒 The same item that cost 100 rupees a year ago might now cost 106-107 rupees.
• 💰 To maintain purchasing power, one must invest in assets that yield returns higher than the inflation rate.
• 🏦 Investing is a strategy to preserve and potentially increase the value of money over time.
• 🌟 The video encourages viewers to subscribe for more daily content on financial topics.
• ⏰ Timely investment decisions are crucial to combat the erosion of purchasing power caused by inflation.
• 🔄 The concept of purchasing power is dynamic and requires active financial management to maintain its value.

Q & A

What is purchasing power?

Purchasing power is the capacity to purchase goods or services with a given amount of money.

How does time affect purchasing power?

Over time, purchasing power typically decreases due to inflation, which leads to the devaluation of money.

What is the relationship between inflation and purchasing power?

Inflation erodes purchasing power because it causes the general price level of goods and services to rise, meaning that the same amount of money buys fewer goods over time.

Can you provide an example from the script to illustrate the impact of inflation on purchasing power?

Yes, the example given is a man with savings of 100 rupees who, after one year with an inflation rate of about 6-7%, would find that the same item now costs 106 to 107 rupees, thus losing 6-7% of his purchasing power.

How does the man in the example make a loss due to inflation?

The man makes a loss because the value of his savings decreases as the prices of goods increase due to inflation, requiring him to spend more money to purchase the same product.

What is the suggested solution to maintain purchasing power in the face of inflation?

The script suggests investing money in places where the returns are higher than the inflation rate to maintain or even increase purchasing power over time.

Why is it important to invest to escape the effects of inflation?

Investing is important to escape the effects of inflation because it allows your money to grow at a rate that outpaces the devaluation of currency, thus preserving or enhancing your purchasing power.

What is the role of interest rates in maintaining purchasing power?

Interest rates play a crucial role in maintaining purchasing power as they can provide returns on investments that can offset the loss of value due to inflation.

How can one measure the loss of purchasing power due to inflation?

The loss of purchasing power due to inflation can be measured by comparing the current prices of goods to their prices in the past and calculating the percentage increase required to purchase the same goods.

What are some common investment options that can help maintain purchasing power?

Common investment options that can help maintain purchasing power include stocks, bonds, real estate, and other assets that tend to appreciate in value over time, potentially outpacing inflation.