CHAPTER 4

THE PURCHASING POWER OE MONEY

(i.) The Meaning of Purchasing Power

A man does not hold money for its own sake, but forits Purchasing Power—that is to say, for what itwill buy. Therefore his demand is not for units ofmoney as such, but for units of purchasing power.Since, however, there is no means of holding generalpurchasing power except in the form of money, hisdemand for purchasing power translates itself intoa demand for an “ equivalent ” quantity of money.What is the measure of “ equivalence ” between unitsof money and units of purchasing power ?

Since the Purchasing Power of Money in a givencontext depends on the quantity of goods and serviceswhich a unit of money will purchase, it follows thatit can be measured by the price of a composite com-modity, made up of the various individual goods andservices in proportions corresponding to their import-ance as objects of expenditure. Moreover, there aremany types and purposes of expenditure, in whichwe may be interested at one time or another, cor-responding to each of which there is an appropriatecomposite commodity. The price of a compositeco mm odity which is representative of some type ofexpenditure, we shall call a Price-level ; and theseries of numbers indicative of changes in a givenprice-level we shall call Index-numbers. It followsthat the number of units of money which is“ equivalent ” in a given context to a unit of pur-

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