Market exchange rates do not reflect purchasing power parity. Nor do they necessarily move towards them even over quite long periods. The law of one price holds for traded goods, but many goods are less than fully tradable or contain non-tradable margin services. See
Balassa-Samuelson effect.
No, it’s bloody hard. See here.
Don’t let jjimm fool you, he’s a chav really. 
The crap dollar is preventing me from getting my full bonus this quarter. I work for an American software company. The tradition has been to price & sell software and services in USD. Our expense targets are also expressed in USD. But our division expenses get charged in GBP. So even though we made quota in sales and maintenance revenue, we blew our expense budget.
You’d think I’d have a lot to contribute to this, since I’ve lived in the U.S. and Canada and visited England loads of times, but I don’t.
Let me just link to this article which analyzes the current prices of motorcyles in the U.S. and Canada.
For the most part, Canadian prices are 10-30% higher than in the U.S., which angers Canucks because it’s so damn easy to cross a border and buy a vehicle. And when you consider that most of the vehicles are made overseas, there’s no real reason to give Americans a discount.
Some manufacturers say Canadians should count themselves lucky, because prices are much higher for the same vehicle in Europe – to which Canadians reply “Well I can’t drive to Europe can I? But I can drive to the States in a few hours!”
As for inflation, manufacturers have been sneaky about it. During the 3 years I lived in New York, I saw many items shrink in size (say, from a 2 L bottle of Coke to a 1.5 L) while the price stayed the same.
Here’s an example of how hard it is to work out purchasing price parity. A Domino’s large tomato & cheese ordered online is £10.99 in Southern England, €15.00 in Dublin, and $14.52 in Orlando. Convert these all to dollars and you get $22.85 in England and $21.71 in Ireland.
However, when I first moved to the UK in 1996 the rate was about £1.00 = $1.45 which would make the pizza only $15.93. More expensive, but not too bad.
To really make you go :eek: at today’s rate premium unleaded petrol (gas to you) is $8.25 per US gallon.
The PPP really gets to the thing that always bothered me about currency conversions. The concept of “dollar” or “pound” is so arbitrary, that it never made sense. Like, sure, the Canadian Dollar is doing better than the US Dollar, but the US Dollar is demolishing the Canadian Quarter!
[QUOTE=Sunspace]
You’re in luck. Five years ago, I had just moved into this apartment and was working at the same job. 
I was paying $600 a month for rent, and making $43,000 a year. Taxes out of my paycheque were somewhat higher, but I believe that food and transport were less expensive relatively. I was paying less in utilities (no cable TV and only dial-up internet), but my web-hosting costs were much higher. And I was paying $500 a month to my debt, and much more than I am now to counselling.
About that web-hosting fee… I’ve been hosting with the same place for ten years, and the price has been in constant US dollars for at least the past six. I’ve been paying $100 US every three months (yes, I know; it’s expensive).
In 2001 it was over $160 Canadian, and I had to struggle to afford it at times, especially since I was paying so much else. These days it’s about $100 Canadian, and may well be less next time I pay it in January.
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So, converting to USD, five years ago you were making $28,600 and this year you are making $50k. In the US, you would have moved into an entire new income range. In most areas of the country, you would have moved from barely scraping by to living a comfortable lifestyle with nice cars, a nice house, and nice vacations.
But, I’m guessing that while you are making good progress in your career, you haven’t noticed a significant increase in your purchasing power.
I’m still scratching my head here. It seems to me that if a country’s purchasing power was low due to whatever policy or whim that kept it that way, that you could simply convert your currency and buy elsewhere.
For example, why couldn’t a Brit convert all of his GBP into USD and buy all of his goods from the USA and make a killing?
[QUOTE=jtgain]
For example, why couldn’t a Brit convert all of his GBP into USD and buy all of his goods from the USA and make a killing?
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Import duties and shipping costs. I’m not British, but I do know that if I (in Canada) order certain things from the USA because they happen to be cheaper there due to the exchange rate or because they are just plain cheaper, I’m going to have to pay import duties. Once the shipping cost is factored in, they generally don’t become a bargain at all.
The favourable exchange rate for the Euro against the Dollar has helped stimulate a boom in Irish consumers visiting New York City and other American cities to do their christmas shopping. I don’t know how many of them end up paying duty on the items they purchase.
[QUOTE=jtgain]
So, converting to USD, five years ago you were making $28,600 and this year you are making $50k. In the US, you would have moved into an entire new income range. In most areas of the country, you would have moved from barely scraping by to living a comfortable lifestyle with nice cars, a nice house, and nice vacations.
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Yes, but all the things around me also increased in price in USD. The rent went from (600 x 0.61) = $366 US at the lowest CAD/USD exchange rate in early 2001 to (680 x 1.06) = $720.8 US today (actually, yesterday, when I paid it).
Imports priced in USD should have decreased in value comparably, but if they themselves were increasing in USD, it might have cancelled out. I don’t remember all that salad from California getting significantly cheaper, for example, even though the web hosting did.
[QUOTE=jtgain]
And, again, I am thinking in dollars. What should I think of? Gold bullion? Silver? Cattle? He asses and she asses? Not trying to be a smart ass, but just looking for info…Thanks
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How about Big Macs?
How come the American doller is so low right now? The Aussie doller is pretty much the best its ever been against it at 93cents
For some perspective on how good we actually have it:
1 Zimbabwe Dollar (ZWD) = 0.00003258 US Dollar (USD)
the u.sian dollar is headed to a bottom (my guess another 15% - 20% drop over the next two years) cause the u.sian economy has been managed quite irresponsibly of late; thank your federal government, they need the attention.
the canadian dollar has been gaining against not only the u.sian dollar, but also the euro & several other currencies quite slowly & consistently over the past few years… in part due to the strength of the canadian economy over-all, and in part due to the petrochemical industry… canadian reserves of oil & gas are vast, and becoming well known around the world.
as well to the failing of certain sectors of the u.sian economy, and the global trend of late, of devaluating the greenback… you gotta consider here as at least a contributing factor, debt loads. the canadian government in running multi-billion dollar surplusses for like the how many years to-back-to-back-to-back-… now? and the u.sians continue to spend how much - billions, i’m sure, a month, if not per week, on a war that is just getting further lost every week…???
that last paragraph alone should knock u.s.ian currency down another 1/10…
[QUOTE=Spoons]
Import duties and shipping costs. I’m not British, but I do know that if I (in Canada) order certain things from the USA because they happen to be cheaper there due to the exchange rate or because they are just plain cheaper, I’m going to have to pay import duties. Once the shipping cost is factored in, they generally don’t become a bargain at all.
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You can bring £145 worth of goods into the UK duty free. Whenever I go to the US on business I go with an empty suitcase and fill it up.
[QUOTE=Arjuna34]
How about Big Macs?
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Wouldn’t this be skewed by the availability of ground beef or cattle in the local market? I understand that steak in Japan is terribly expensive because of the low amount of cattle in the area.
Wouldn’t this make the Big Mac index as useless as say, A Price of Gasoline index?
[QUOTE=jtgain]
As a middle class US person, a nice meal, at a nice restaurant for two would be around 50 USD total, or 25 GBP..
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I think you might not be using the term “nice restaurant” in the same way as jjimm
In my neck of the woods, $50 would be at an “okay” restaurant, likely Asian or Mexican, where you do do sit down and get waited on, but you order by number off the menu. In fact, we frequent such a place in our area, and our total cost comes to about $55 or so–that’s two dinners, one alcoholic drink and one soft drink.
A nice restaurant, the sort of place you’d go to celebrate a special occasion, is going to cost a couple much more than $50, particularly if wine or other alcohol is going to be consumed.
I don’t understand all the high finance part of this. I break it down to how many hours I have to work to pay for a specific item. Fact is I have to work longer than I did ten years ago to buy a loaf of bread.
And what is middle class? According to everything I see on the news it is the $100g-500g range. Poverty level is way low, like 12g for a family of four. I make about 40G before taxes. I am not poverty level for sure, but I fall far short of the 100G middle class. What are us “Average Joes?” Low class? No class? 3rd class? Come to think of it I have been called all of them…
[QUOTE=jtgain]
I understand that steak in Japan is terribly expensive because of the low amount of cattle in the area.
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Japanese beef is terribly expensive because it’s farmed in a very particular way. However, most beef sold in Japan is Australian, American or Canadian (depending on the current mad-cow-scare-of-the-month), and it’s a lot cheaper. You’d probably still find it expensive compared to North American prices, but it’s not so much that I’d think twice about buying a 300-400 grams for a pasta sauce or Cottage pie.
[QUOTE=jtgain]
And, again, I am thinking in dollars. What should I think of? Gold bullion? Silver? Cattle? He asses and she asses? Not trying to be a smart ass, but just looking for info…Thanks
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Mark Twain put it in terms of “pounds of chicken.” Since most economists haven’t read A Connecticut Yankee, I’ve seen references to “McDonald’s dollars;” the idea is not asking
“a production engineer in a factory makes X€ in Italy, on average. A production engineer in a factory makes $Y in the USA, on average. Which one makes more money?”
but
“a production engineer in a factory makes X€ in Italy, on average. A production engineer in a factory makes $Y in the USA, on average. Which one can eat more cheeseburgers at MickeyD with the amount he makes? (the one who can get the highest cholesterol wins)”
In Spain at least, chain restaurants, no matter how nice, are never as well considered as family-owned ones. So a lot of what Americans consider “nice restaurants” would be in a list called “decent chain places” over here.
[QUOTE=Nava]
but
“a production engineer in a factory makes X€ in Italy, on average. A production engineer in a factory makes $Y in the USA, on average. Which one can eat more cheeseburgers at MickeyD with the amount he makes? (the one who can get the highest cholesterol wins)”
.
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I think the one who gets to live in Italy wins, hands down.