Unit 5, Lesson 13 Currency Fluctuation and Purchasing Power AOF Business Economics Copyright © 2008–2011 National Academy Foundation. All rights reserved.

Businesses depend on consumer spending When consumers feel wealthy, they purchase more goods and services, and that tends to drive prices and profits up. How do you feel the economy is doing right now? Do people feel like spending or saving?

Purchasing power helps measure national wealth To measure individuals’ real incomes, it’s important to look not only at how much money they make, but what that money can buy (its “purchasing power”). In Japan, the average worker earns more than in the US; but prices are much higher in Japan, and the money buys less. Purchasing power of average household income in selected countries Brazil $9,700 European Union$32,300 Japan$33,600 Mexico$12,800 Thailand$7,900 United States$45,000

To measure a currency’s purchasing power, economists look at the price of a “basket of goods” Economists measure the purchasing power of a currency by comparing how much a similar “basket” of common, tradable goods costs in each country, in local currency. What would you include in a basket of necessities?

Many factors can diminish purchasing power These include: Inflation Currency devaluation Dependence on relatively expensive imports Growth of competing economies High national debt

Economists help businesses understand purchasing power Generally, businesses seek to sell products and services where the purchasing power of consumers’ incomes is high. They generally seek to manufacture where wages are low. Economists provide businesses with detailed economic information to help them make decisions.