THE MEANING OF PURCHASING POWER

A man does not hold money for its own sake, but for its purchasing power—that is to say, for what it will buy. Therefore his demand is not for units of money as such, but for units of purchasing power. Since, however, there is no means of holding general purchasing power except in the form of money, his demand for purchasing power translates itself into a demand for an ‘equivalent’ quantity of money. What is the measure of ‘equivalence’ between units of money and units of purchasing power?

Since the purchasing power of money in a given context depends on the quantity of goods and services which a unit of money will purchase, it follows that it can be measured by the price of a composite commodity, made up of the various individual goods and services in proportions corresponding to their importance as objects of expenditure. Moreover, there are many types and purposes of expenditure, in which we may be interested at one time or another, corresponding to each of which there is an appropriate composite commodity. The price of a composite commodity which is representative of some type of expenditure, we shall call a price level; and the series of numbers indicative of changes in a given price level we shall call index numbers. It follows that the number of units of money which is ‘equivalent’ in a given context to a unit of purchasing power, depends on the corresponding price level and is given by the appropriate index number.