Something’s been bugging me lately. Is it possible to calculate purchasing power? Evidently if the Federal Reserve prints money like mad and it enters circulation the dollar will lower in purchasing power. However, can we tell by how much precisely? e.g. 1850’s Dollar is worth 75% of 1843’s Dollar
I had always assumed that calculating the exact purchasing power was impossible, but recently I’ve seen people throw such graphs around and well - help?
I don’t see how it would be possible to represent changes in purchasing power in absolute terms. A number of prices drop due to advances in technology ,more efficient production etc. I think it is possible to get a general idea with a relative degree of accuracy. However any statistical model is going to have flaws.
No, it is not possible to calculate lost purchasing power. I hate how Ron Paul throws out, “the dollar has lost (insert percentage) purchasing power”, without taking into account the rise in wages. Not only that, but it does not take into account technology. How can one measure the savings gained from technological advances?
What does this have to do with the purchasing power of money? I think you’re confusing the purchasing power of income with the purchasing power of money.
If my monthly electric bill is $100 today, and it was $10 a month a year ago (assuming the same amount of electricity is used), did the dollar lose purchasing power if I am now making ten times as much (doing the same work) as I was fifty years ago? Yes, I cannot buy as much with a dollar today as I could 50 years ago, but I have more dollars! If wages have gone up, to say that purchasing power is lost because prices have gone up is misleading.
Oh, good you noticed Ron Paul throwing that statistic as well;its actually the (primary) reason I’m asking. You guys don’t suppose we should go and tell the Doctor that he’s using faulty statistics?
What Ron Paul is referring to is the purchasing power per dollar. The purchasing power of wages can then be extrapolated by taking into consideration the purchasing power of the dollar. The purchasing power per dollar, in turn, is based completely on the average increase in prices (measured through the consumer price index); it’s based on a general inflation index.
Ron Paul is simply pointing out the absurdity of the Fed’s claim to be protecting the value of the dollar. I agree it is rather misleading but still it is true; 96% of the purchasing power has been stolen from the public over the course of almost 100 years.
Paul chooses to compare the price of gold to the dollar. Gold as a commodity today is nearly identical to what it was a century ago. It is possible to compare the price of any good or service to the price of an identical good or service at any time in the past. Although many factors other than simply the value of money might cause changes in these relationships, this type of comparison at least supplies a valid point of reference. Since Paul often has to fit his points into sound bites, this is one effective way of getting his point across.
The approach is far superior to those of the people who debate him. The consumer price index is useless (what were consumers buyiing in 1971 that can be compared to today’s smart phones?). Foreign exchange rates, in a world of fiat currencies, is as well.
Then when Paul is speaking about the purchasing power of the dollar, his speaking in relation to gold (which is a relatively stable)? I suppose that is a better method by which to calculate the purchasing power of the dollar.
However, how would one calculate the purchasing power of money in a gold standard world? Paul’s method of using the value of the dollar in relation to gold wouldn’t be feasible here (since the dollar would be in fact gold). Would we have to base off the purchasing power of the gold dollar in relation to another commodity? Or rather, what commodity would we be able to use that is as stable as gold?