Eli5: why does currency strenght matter? Why does it matter if my currency is 1=1£ or 10=1£?
In: Economics
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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