# Question on international exchange rates.

155 views

If the exchange rate from US dollars to Euros is \$1= £0.92 which currency has more purchasing power?

In: Economics

The exchange rate itself does not transfer to purchasing power. For example, someone with GBP would pay £0.92 for an item priced at \$1.

Exchange rates alone generally don’t mean much. If a hamburger costs \$1 in the United States but £5 in the UK, you could say that the dollar has more purchasing power than the pound even though the exchange rate from dollars to pounds suggests the pound is “stronger”.

But even that would depend on taking into account more factors to make sure you’re comparing apples to apples – it could easily be that beef is simply cheaper in the US because of extensive farm subsidies, for instance, so you’d need to compare many different products across many different types of expenses (energy, food, service, products, etc) to get a sense of which currency has a higher purchasing power in its respective home country.

It doesn’t work like that – the explicit rate between two currencies doesn’t tell you anything about anything, really. To illustrate, consider that \$1 is also 100 cents. So you could say that 100c = £0.92. Now the number’s 100 times larger! Yet \$1 and 100c have exactly the same purchasing power.

You can’t answer this question from just the exchange rate on its own. Purchasing power has to do with how much you can buy with a given currency unit.

To know the purchasing power, you’d have to know the respective prices of a comparable basked of goods in the US and the EU.

The exchange rate from USD to EUR cannot be \$1=£0.92 because the latter are pounds, not euros.