Enter the total amount of money, reference year, and target or current year. The buying power calculator will display the total dollar value with respect to the current year.
What is buying power?
Buying power is a term used in macroeconomics to describe the effective purchasing power a currency has from one year to the next. In other words, if you had 1$ back in 1913, what is the equivalent amount that dollar is worth today in 2020.
You might be asking why would the value of that dollar change? That’s due to inflation. Inflation is the ever-decreasing power of currency due to the rising prices of goods. For example, back in 1900 1$ could buy you a whole box of candy, today, that 1$ would only get you 1 stick of candy due to inflation. Why inflation occurs is an entire subject itself.
How to calculate buying power?
Calculating buying power if the reference to previous years is also very difficult. Usually, entire agencies are dedicated to determining this through measuring inflation.
The reason calculating buying power is so difficult is that, if you take the example about the candy from before, I’m missing a few key factors. For one, back in 1900, it was extremely more difficult to make one bar of chocolate than it is today where one machine can make 1000s of bars a day.
That improvement in efficiency needs to be taken into account when calculating inflation. That improvement in efficiency also goes all the way down the chain to improvements in the gathering of just raw materials. So in short, inflation the driving factor of buying power is extremely difficult to measure accurately.