PDSnet Glossary

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Definition

The ability of a currency to be exchanged for goods and services. The purchasing power of most paper currencies decreases because of inflation over time. Inflation, in the long term, results from the money supply growing more quickly than the real growth in the economy. The money supply (M3) is a symbol of the goods and services in the economy - so if it increases more rapidly than the growth of those goods and services, then its purchasing power will tend to decline. The decline in a currency's purchasing power erodes its function as a store of value. Over time if a country has a higher inflation rate than its trading partners, its products will become less competitive and the value of its currency will fall in relation to their currencies.

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