And what do people mean when they say one currency is “stronger” than another?
In: Economics
Let’s say you have country A and country B. Country A uses green pieces of paper for money, country B uses blue pieces of paper.
Currently the average income in country A is 50,000 pieces of green paper per year. The average income in country B is 25,000 pieces of blue paper per year. The exchange rate for green paper to blue paper is 2/1. Meaning when you exchange your money, 2 pieces of green paper buy you 1 piece of blue paper.
So that means the average income is the same, right? Not necessarily. Now we get into purchasing power parity. While on paper the incomes look the same, it may be that the stuff in country B is just cheaper than the stuff in country A. Whether it’s due to taxes, a worse transportation system, less land available, or whatever, country A is more expensive to live in. You buy a car in country A and you’re paying more than your counterpart buying the same car in country B.
Purchasing power parity is an attempt to determine how much you can really afford to buy.
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