If the exchange rate from US dollars to Euros is $1= £0.92 which currency has more purchasing power?
In: Economics
If we make the big (and probably wrong) assumption that all prices are equal (a Big Mac costs $3 in the US and £3 in England), than the answer is the British Pound*. An American with $3 in their pocket would get to England, change those dollars for £2.76 (3 * .92), and not be able to afford a Big Mac. A Brit with £3 in their pocket would get to the US, change those pounds for $3.26 (3 / .92), buy their Big Mac, and still have money left over.
But in reality, the price of the Big Mac (and other, more important goods) will be a different number in each country. The only way to really know the answer is to price out a “basket” of common goods in each currency and country. For instance, if the basket costs $100 in the US, but £90 in England, the dollar has more power: an American with $100 would go to England, change his money for £92 (100 * .92), buy the basket, and still have £2 left over. A Brit with £90 would arrive in the US, only be able to get $97.83 (90 / .92), and couldn’t afford the basket.
*You said Euros, but used the Pound symbol. I’ve gone with pounds.
The exchange rate from USD to EUR cannot be $1=£0.92 because the latter are pounds, not euros.
Depends on cost of good relative to exchange rate. Prices aren’t static across countries/currencies. If a Coke is $2 and also £2, then the dollar denominated Coke is cheaper. If the Coke in England is only £1.80 then it would be cheaper.
And just looking at 2 numbers static in time tells nothing about relative purchasing power. If the exchange rate was $1= £0.92 and shifted to $1 $1= £1, then the dollar would have gained purchasing power relative to the pound as it strengthened. But the base rate in and of itself tells us nothing.
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.
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.
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.
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