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How does purchasing power work?
Purchasing power boils down to how much you can buy (a good or service) having a certain amount of money and works from the relationship between the value of products and/or services and the value of money. This is what you need to understand before moving on to the main question.
However, the functionality of purchasing power goes a little (or should I say a lot?) further, including monetary policies, major bank regulations and economic crises. But calm down, you can understand it better if you at least know how inflation and local currency appreciation/devaluation influence this dynamic.
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- INFLATION
As inflation generates a generalised increase in the price of things, affecting products from various sectors at the same time, it diminishes purchasing power, after all, products become more expensive while you keep the same amount of money.
Even if there is an increase in salary, if there is also an increase in the price of things you still lose purchasing power since you can no longer buy what you would have bought before with the same value you had/have.
- LOCAL CURRENCY
Just like inflation, the appreciation and devaluation of the local currency corresponds directly with the value of products, with the difference that the influence is wider, affecting, proportionally, the currency of other places as well.
In simpler terms, when a currency appreciates in value, the value of the products in which that currency is used will decrease; on the other hand, other currencies will be less valued (a little or a lot depending on the economic situation of the country) and therefore the value of the products in which that currency runs will increase.
How are the European and US economies doing?
Before quoting purchasing power it is worth knowing the financial situation of the country, see how the USA and some European countries are doing:
| Annual GDP | GDP per capita USD/h | CURRENCY | CURRENCY VALUE | INFLATION | |
| USA | 20.94 trillion USD (2020) | 63,543.58 USD (2020) | USD | 1 USD = 0,89 EUR | 7% (2021) |
| Spain | 1.281 trillion USD (2020) | 27,057.16 USD (2020) | EUR | 1 EUR = 1.13 USD | 6,5% (2021) |
| Italy | 1.886 trillion USD (2020) | 31,676, 20 USD (2020) | EUR | – | 1,9% (2021) |
| France | 2.603 trillion USD (2020) | 38,625.07 USD (2020) | EUR | – | 10,06% (2021) |
| Russia | 1.483 trillion USD (2020) | 10,126.72 USD (2020) | RUB | 1 RUB = USD0,013 | 8,5% (2021) |
| Germany | 3.806 trillion USD (2020) | 45,723.64 USD (2020) | EUR | – | 24,2% (2021) |
| Luxembourg | 73.26 billion USD (2020) | 115,873.60 USD (2020) | EUR | – | 5,4% (2021) |
| Norway | 362 billion USD (2020) | 67,294.48 USD (2020) | NOK | 1 NOK = 0,11 USD | 5,31% (2021) |
| Ireland | 418,6 billion USD (2020) | 83,812.80 USD (2020) | EUR | – | |
| Switzerland | 748 billion USD (2020) | 86,601.56 USD (2020) | CHF | 1 CHF = 1.09 USD |
Ps: were you curious to know which European countries use the euro and which do not? Check out the countries that use the euro on the EU’s official website.
- Many of those 2020 GDP figures had increases in 2021 that even surpassed records from previous decades.
- Inflation followed the same path, with growth exceeding records and forecast targets.
- Another thing that has changed is currencies, appreciating and depreciating several times during the year.
This whole situation, as you are already aware, greatly affects the purchasing power of citizens.
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What is the average salary of Americans and that of Europeans?
Knowing the economic context is important, but it is not enough to know the purchasing power of Americans and Europeans; the main determinants are actually salary and cost of living. So, what are they?
| Population | Minimum wage | Average salary (per year) | Cost of living | |
| USA | 329.5 million | 7,25 USD/h | 60,220 USD | Medium |
| Spain | 46.35 million | 1.070,84 USD | 30.764 USD | Bass |
| France | 67.39 million | 1.752,33 USD | 44.351,01 USD | High |
| Italy | 59.55 million | – | 33,366.40 USD | High |
| Russia | 144.1 million | 169,5 USD | 6.696,36 USD | High |
| United Kingdom | 67.22 million | 11,13 USD/h | 44.629,20 USD | High |
| Germany | 83.24 million | 10,71USD/h | 58.723,81 USD | High |
| Luxembourg | 632.275 | 2,202 USD | 67,001.97 INR | High |
| Norway | 5.379 million | – | 65,950.51 USD | High |
| Ireland | 4.995 million | 11.20 USD/h | 38,500 USD | Bass |
| Switzerland | 8.637 million | 4.242,80 USD | 60.960,37 USD | High |
After all, who has the greater purchasing power: Americans or Europeans?
It may come as a surprise to you, but yes, Europeans have greater purchasing power than Americans. Are you asking yourself “how come?”, especially after these comparisons and it becoming even more obvious that the US is the rich country? I imagine so.
The US may even be the richest country in the world in absolute terms, but it lags behind some European countries in terms of parity.
And why do Europeans have greater purchasing power?
GDP is the biggest indicator of a country’s wealth, but it has some flaws, since in its calculations investments and differences in imports and exports, known as the trade balance, are not considered. And even GDP per capita, which divides the value of GDP by the population in an attempt to level out, is still not effective in considering wealth. They are still totalitarian and do not consider variations.
So, then behold, the GDP PPC (Gross Domestic Product Purchasing Power) arises, which divides the GDP by the average cost of each country. This is where purchasing power comes in (review the tables considering salary, cost of living and population) and so the United States, even quite rich, still ranks 7th among the Countries with the Highest Purchasing Power with $63,416 per year per person, with 4 European countries ahead of it.
- 6° Norway $65.800
- 5° Switzerland $72.874
- 3° Ireland $94.392
- 1° Luxembourg $118.002
