Eli5: why does currency strenght matter? Why does it matter if my currency is 1=1£ or 10=1£?
In: Economics
It matters for international business.
For example, the Canadian Dollar, 1.38CAD=1USD. If a business in Canada is making a sale to a company in the US, the US company cares about what it’s going to cost in USD, but the Canadian company cares about what they’ll make in CAD because that’s what they need to pay their business expenses with (most notably salaries). If the exchange rate gets too imbalanced, they might not make enough money to actually pay their employees.
Whether the exchange rate is 1 to 10 or 1 to 20 does not matter at all. At that matters is the change over time.
It doesn’t. The change of relative strengths over time matters – if currency A drops vs currency B, then it will be more expensive for country A to import from country B, for example.
But if 1A = 1000B, constantly, forever, then it’s irrelevant. It may just happen that there are 1000 more units of currency B in circulation than currency A, and the “market cap” of both currencies is the exact same.
Imagine country A, with currency A, has a “wealth” of 1 billion, and currency A has 1 million units in circulation. Each unit of A is worth 1000.
Country B, with currency B, has a “wealth” of half a billion, but there are only 10 units of currency B in circulation. Each unit of B is worth 50 million.
1B = 50000A. Does that mean B is the stronger currency? No – each unit is more valuable, but as a currency A is representing double the value.
The most powerful currency in the world, by VERY far, is the USD – yet the euro and gdp have stronger units.
The relative strength doesnt matter .. indeed perhaps even the change over time.
What really matters is the relative price of products in one market in that currency compared to the price of products in the other country converted into the other country’s currency using the exchange rate. (Or vise versa) . This is known as Purchasing Price Parity.
If prices for products (especially tradable products – ones that can be moved between countries) in one country are consistently more expensive than those same products in the other country (using prices converted into one of the currencies ) then it makes sense to buy products produced.in the country with the cheaper prices and sell them in the country with the other country.
This means that more.people will be employed making those exports and less people.will.be employed.making those things in the other country.
If however the exchange rate changes but prices in each country to make those relative prices stay the same also occur then there wont be the incentive for these imports/exports to occur.
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