Purchasing power

The price system makes possible to communicate the combined knowledge (in terms of supply and demand) from people each of whom possessed only a portion of it. Based on that equally divided knowledge people plan, interact and coordinate the utilization of resources, producing a solution. — Summary from The Use of Knowledge in Society. F.A. Hayek. 

Purchasing power: # of products exchanged per monetary unit.

It is determined by the demand of money (# of products exchanged) and the supply of money (# of monetary units exchanged).

Price: # of monetary units exchanged per product.

Purchasing power = 1 / price.

A higher preference for saving causes a purchasing power increase and makes the society wealthier.

Monetary equation of exchange: M*V = P*Q

M = # monetary units

V = # times a monetary unit is exchanged for products per time "t"= 1 / average "t" holding a monetary unit.

P = price per product

Q = # products exchanged per time "t"


purchasing power = Q * avg "t" holding an unit / M

Purchasing power is directly related to avg "t" holding an unit, that is, how much time savings last when maintaining an average consumption.

Basic example:

Society consisting of two members. M and Q are constant.

M = 4 gold coins

in terms of price, 1 apple = 1 fish

Alice produces 8 fishes per day and Bob 8 apples per day, so Q = 16

Alice only consumes what Bob produces and vice versa.

t = 1 day

if preference for savings = 1 day of average consumption:

Purchasing power of 1 gold coin = 16 * 1 / 4 = 4 (4 fishes or 4 apples)

if preference for savings = 2 days of average consumption:

Purchasing power of 1 gold coin = 16 * 2 / 4 = 8 ( 8 fishes or 8 apples)

A higher preference for saving forces prices to go down. Now Alice and Bob have a greater quantity of savings, while their production and consumption level is maintained.



The purchasing power of money is not only about its quantity, it is also about its relative demand as savings.

​Presumably, higher quality money will be more in demand than an insecure one.