What Is Purchasing Power| How It decreases With Inflation

The World OF Financial Knowledge

24 Mar 202201:04

Summary

TLDRThis 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.

Outlines

00:00

💵 Understanding Purchasing Power

This paragraph discusses the concept of purchasing power, which is the ability to buy goods and services. It explains how purchasing power can decrease over time due to inflation, which devalues money. The example given is a man with savings of 100 rupees who, after one year, finds that due to a 6-7% inflation rate, the same amount of money can no longer buy the same quantity of goods. The item that cost 100 rupees a year ago now costs 106 to 107 rupees. The man effectively loses 6-7% of his purchasing power. To counteract this loss, the speaker suggests investing money in ways that yield returns higher than the inflation rate, thereby maintaining or increasing one's purchasing power over time. The video concludes with a call to action for viewers to subscribe for more content.

Mindmap

Keywords

💡Purchasing Power

Purchasing power refers to the ability of a consumer to purchase goods and services. It is directly related to the value of money, as it indicates how much one can buy with a certain amount of currency. In the video, the concept is used to explain how the value of money decreases over time due to inflation, which reduces the purchasing power of the consumer. For instance, the man with savings of 100 rupees experiences a loss in purchasing power because the same amount of money can't buy the same quantity of goods after a year due to inflation.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. In the script, inflation is described as a factor that devalues money over time, causing the same amount of money to buy less over time. The example given is that a product that cost 100 rupees a year ago might cost 106 to 107 rupees due to a 6-7% inflation rate.

💡Devaluation

Devaluation in the context of the video refers to the decrease in the value of money over time. It is a key factor contributing to the reduction of purchasing power. The script illustrates this by showing that money saved for a year loses value due to inflation, thus requiring more money to purchase the same item.

💡Savings

Savings are funds deposited or set aside for future use. In the video, the man's savings of 100 rupees serve as an example of how money can lose value if not invested or utilized effectively. The concept is used to highlight the importance of managing one's money to maintain or increase purchasing power.

💡Investment

Investment in the video is presented as a strategy to counteract the effects of inflation and maintain purchasing power. It refers to the act of allocating resources, such as money, with the expectation of generating an income or profit. The script suggests that to escape the loss of purchasing power due to inflation, one should invest money in places where returns are higher than the inflation rate.

💡Returns

Returns in the video script refer to the profits or income generated from an investment. It is mentioned as a way to ensure that one's money grows at a rate higher than inflation, thus preserving or enhancing purchasing power. The script implies that choosing investments with good returns is crucial for maintaining the value of one's savings.

💡Currency

Currency is the money in the form of coins and banknotes of a particular country. The script uses the term in the context of rupees, which is the currency of India. The value of currency is central to the discussion of purchasing power and inflation, as it is the medium through which goods and services are bought and sold.

💡Quantity of Goods

The quantity of goods refers to the amount of products or services that can be purchased with a certain amount of money. In the video, the concept is used to demonstrate how inflation affects the purchasing power of money, as the same amount of money can buy fewer goods over time.

💡Loss

In the context of the video, loss refers to the decrease in the value of money due to inflation. The man with 100 rupees experiences a loss of purchasing power, as the same amount of money can no longer buy the same quantity of goods after a year. The term is used to emphasize the negative impact of inflation on savings.

💡Rate of Inflation

The rate of inflation is the percentage increase in the general price level of goods and services in an economy over a period of time. In the script, it is given as 6-7%, which is used to calculate the loss in purchasing power. The rate is a key metric in understanding how quickly the value of money is eroding and the need to find investments that can outpace it.

💡Daily Content

Daily content in the video script refers to regular updates or information provided by the channel. It is used to encourage viewers to subscribe for more frequent and consistent information, similar to the topic discussed in the video. This term is part of the call to action at the end of the script, indicating the channel's intent to provide ongoing educational content.

Highlights

Purchasing power is the capacity to purchase an item at a given time.

Purchasing power decreases over time due to devaluation of money and inflation.

With inflation, the same amount of money can't purchase the same quantity of things after some time.

Example given: A man with savings of 100 rupees for one year experiences purchasing power loss due to inflation.

Inflation rate is calculated to be around 6 to 7 percent.

An item that cost 100 rupees a year ago now costs 106 to 107 rupees due to inflation.

The man incurs a loss of almost 6 to 7 percent due to inflation.

To maintain purchasing power, one must invest money where returns are above the inflation rate.

Investing in areas with returns above inflation helps to preserve purchasing power over time.

The video concludes with a call to action for viewers to subscribe for more daily content.