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“Purchasing power”; From economic roots to social and cultural consequences

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“Purchasing power”;  From economic roots to social and cultural consequences

What is purchasing power?
When talking about purchasing power, in simple terms, it means how much goods or services we can buy at a given time with a given currency (dollars or rials).
Saying at a specific time means that the purchasing power index can be different and variable in different times and places for various reasons. For example, during the past few decades, the purchasing power of us Iranians has been constantly changing.

But in specialized language and according to economists, purchasing power is the ratio of household income to the general level of prices (inflation trend). If this ratio is constant in a period of time, it means that the purchasing power of the household has been constant during that period, but if the income remains constant and the general level of prices increases, the purchasing power decreases. On the contrary, if it happens, the purchasing power will increase. Therefore, examining the status of indicators such as annual household income and inflation and the factors affecting it, can show a clearer picture of the purchasing power of the Iranian people.

Inflation rate and purchasing power
Therefore, one of the indicators that can show our purchasing power is the inflation rate trend. In the graph below, this index is shown for two decades, from 1380 to 1400.

The inflation rate in 2012 was close to 28% and in 2019 it reached its highest level in two decades by crossing 47%.Inflation in 2004 was lower than in 2010. This index reached nearly 28% in 1392 and reached its highest level in two decades in 1399. Since the inflation rate has never been zero, it can be said that in the 20 years in question, the value of the national currency has been continuously decreasing, sometimes less and sometimes more. That is, every year, the purchasing power of the national currency has been reduced by the rate of inflation, and as a result, the purchasing power of the people has been continuously decreasing.

What causes this swelling? In simple words, two main variables cause inflation and decrease in people’s purchasing power. One is budget deficit and the other is exchange rate fluctuations; It means dollars.
When the government’s income and expenditure are not consistent with each other, the government is forced to borrow from the central bank for its expenses, which to a large extent means printing unsupported money and as a result, increasing the money base and liquidity, followed by an increase in the inflation rate. So, in order to prevent the increase in inflation, the government should make sure that its revenues meet its expenses; Either reduce his expenses or increase his income.

Two main variables cause inflation and decrease in people’s purchasing power. One is budget deficit and the other is exchange rate fluctuations; It means dollarsexchange rate
Apart from the inflation caused by the budget deficit, the effects of the exchange rate on the micro and macro economy of the country are clear and obvious, especially on the inflation rate; Therefore, it is considered a very important variable in people’s purchasing power, because on the one hand, people’s incomes are in Rials, but on the other hand, most of the goods and services produced are a direct function of the exchange rate (dollars); Therefore, as the growth of the exchange rate means the decrease in the value of the national currency, it also indicates the decrease in the purchasing power of the people. When the exchange rate increases, business owners and producers of goods and services raise prices accordingly and even more.

The graph below shows the exchange rate trend in 20 years from 1380 to 1400. As can be seen, in the first 10 years, the trend of the dollar rate did not increase much, but from 1390 to 1395, it has more than doubled. After that, there is no need to say that the price of the dollar has increased more than 7 times in 5 years.
In fact, from 1396 to 1400, the exchange rate has increased sharply, and the similarity of its upward trend with the upward trend of the inflation rate in the previous graph (from 1396 to 1400) clearly shows the relationship between the dollar rate and inflation, and as a result, the decrease in people’s purchasing power.

Urban household income and purchasing power fluctuations
The result of both mentioned indicators, i.e. inflation and exchange rate, shows itself in household income. If the household income does not increase with the increase in inflation and exchange rate, the purchasing power will decrease in the same proportion. But in practice, along with the increase in inflation and exchange rate in the years under review, income has also increased. The point is that the income has not increased as much as those two indicators; The amount of increase in income in the two decades under review has been lower than the increase in inflation and exchange rate.

The graph below shows the income of Iranian urban households in dollars. In the years 1391 and 1397, the amount of income has dropped drastically because the income of urban households has not increased in proportion to the increase of the dollar.

Social and cultural dimensions of purchasing power
“Purchasing power” has cultural and social layers; For example, the increase in exchange rate and inflation does not affect all social classes in the same way. The upper social classes and the tenth income earn the most profit from the increase in inflation; On the other hand, social strata with fixed income, such as employees, workers and retired pensioners, are the most affected by inflation and currency appreciation.

When the monetary base and the amount of liquidity increases, a large part of it, which is the payment of salaries and benefits of government employees, is spent by the middle class, employees and workers to buy goods and services that are available and sold by the upper deciles of income.

High inflation makes the rich richer and the poor poorer, and by creating class collapse, it gradually pushes the middle class and the middle income deciles to the lower class and the lower income deciles.As a result of inflation, these goods and services have become more expensive day by day, and as a result, low and middle income deciles pay more of their income and salaries to buy them; In this way, the flow of liquidity moves towards the sea of ​​the upper social class, like the water of small and medium streams and rivers, and their income and assets are continuously increased.
Therefore, high inflation makes the rich richer and the poor poorer, and by creating class collapse, it gradually pushes the middle class and the middle income deciles towards the lower class and the lower income deciles.

This will have many consequences in the form of the growth of all kinds of injuries and social and cultural issues for the society. Therefore, it is necessary for the country’s politicians and decision makers to think of a solution for it. It means to strengthen people’s purchasing power and prevent harmful social and cultural trends.

To increase purchasing power, two things must happen at the same time:
1. Control and reduce inflation.
2. Household income will increase.

At the same time, by strengthening the production sector, job creation will also be helped and economic stagnation will be prevented. If household income increases nominally, but inflation is not controlled, this means a short-term and temporary restoration of household purchasing power; Because soon the increase in inflation will swallow a significant part of the household income and its purchasing power will decrease again.


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