Purchasing power is what your money can buy. A paycheck of $500 buys less when prices are high than when they are low. Inflation erodes purchasing power over time. Deflation increases it, though that brings its own problems.

Economists measure purchasing power with price indices. They compare what a basket of goods costs in different periods or places. The same salary in San Francisco and rural Kansas buys very different lives. Exchange rates extend the idea across borders. A dollar converted to pesos may go further in Mexico than in the United States.

Wages can rise while purchasing power falls. If pay increases 3 percent and prices rise 5 percent, workers are worse off in real terms. This gap is why unions, pensioners, and minimum-wage advocates focus on real wages rather than nominal ones.

What affects it

• Inflation and deflation
• Wage growth
• Taxes and deductions
• Exchange rates
• Local cost of living