This is the amount of goods money can buy. Factors that affect the value of money are
- Changes in general price level of commodities
- Changes in real income of people.
- Changes in the quantity of money in circulation.
The value of money can be measured through the price “Index Number”. Index number therefore, is the method used in circulating the average change in the prices of a group of goods and services. To achieve this, an appropriate base year may be chosen, that is, when prices of goods appear to be relatively stable.