I’ve noticed a common misconception with currency conversion with USD and currencies which have lower value dollars, which is that people assume say if 1 USD equals 125 yen wow I am rich in Japan!
I live where 1 USD equals 6 local dollars, but that does not mean USD is worth six times as much! Just that most things that would be a dollar in the USA are six bucks here.
So what is a better way to make people understand that lower denomination dollars are not really X times more?
The best way is to have them visit the country and buy a few things. When they find that an ordinary meal costs 1,000 yen in Japan or 10,000 won in South Korea, they’ll find that being a millionaire in those countries is of no significance.
I really don’t think there is an easy way. I’m a coin dealer in the US and get this every day. Phone call "I have 20 dollars Australian, how much will you pay me? "
The Aussie dollar right now is about 0.70 US dollars right now. S0 I’ll pay 0.50 cents US. But they saw that the Aussie dollar is 1.348. They don’t understand that they won’t get $1.34 US for their Aussie dollar.
I think you are looking at the concept of purchasing power parity since you are more concerned with how much you can buy for X number of Shmoos. You can use that to compute a real exchange rate (link to the wiki page is in the link above) and compare that to the exchange rate being offered in the currency markets to see if there’s a difference in purchasing power.
There was an amusing example of innumeracy, calculating percentages when the Thai baht plummeted in 1998. After falling from 26 to 39 baht-per-dollar, the Bangkok Post announced that the Thai baht “had lost 50% of its value.” (The difference, 39-26 = 13, is one-half of the original 26.)
The baht continued to fall; when it reached 52 baht-per-dollar, the Post did NOT write that the baht had lost 100% of its value, though that would have been the conclusion had their original arithmetic made sense!
Make an analogy to other arbitrary measurements, maybe? If you convert inches to centimeters, you get more than twice as many centimeters but it isn’t any longer.
The Big Mac index relates it in easily understandable terms.
When I worked in a Birmingham factory, one of my packers, a lad from Dublin, used to hitch-hike back home as often as he could. I asked him one day, how he got on with the two currencies - he was paid (cash) in Pounds and the Irish at that time, use Punts. A Pound was worth around 1.25 Punts, or conversely a Punt was worth about 80p.
He told me that his mother took the Pounds and gave him a really good deal by exchanging them one for one. I never had the heart to tell him that his Ma was ripping him off.
In relation to this, as I grew up I began to notice that certain countries had a basic monetary unit that was mostly on the same ‘scale’ as a US dollar (British Pound, German Mark, French Franc etc.), while with a lot of countries theirs is always closer to a dime or so, like the Mexican Peso, Italian Lire, Chinese Yen etc.
I realize it is a complicated, multi-dimensional scale, a US dollar today doesn’t buy nearly what it bought a hundred years ago etc., but still why did some countries’ basic units stay so much lower? Is it a matter of their economies simply never experienced the magnitude of growth that the earlier industrialized ones did?
Many countries have re-valued their currencies when the basic unit got too small. When I first went to Turkey, everything was priced in thousands of Lire. A cup of coffee was something like 1,500TL. I hired a car for 1,000,000TL a week. They simply, as many countries like France did, divided by 1,000.
Zambia did the same (at least once). I think that the more pertinent point here is; why have countries like the UK and the US never had to do this?
That’s not what he’s refering to. PPP just tells us whether or not the actual exchange rate is a bit out of whack with what your money could buy in the country. For instance the exchange rate is 1 dollar = 5 local currency but in fact you can buy more stuff with 5 curency in this country than you could with 1 dollar in the USA. PPP is more accurate when, say, comparing GDP, because a sudden significant variation of the exchange rate of 10%, for instance, will make the GDP appear to have suddenly dropped or raised by 10% too while obviously the country’s production didn’t collapse just because there has been exchange rate variations.
What he’s talking about is much simpler. It’s the idea that if 1 dollar is worth 100 local currency, you’ll be able to buy 100 times more stuff in this country with your dollar than you could in the USA. That’s not a very common belief, I think. More common is the assumption that a country whose currency has little worth is equally poor, while in fact it’s no different from assuming that people living in France are taller than people living in the USA because a meter is longer than a foot.
By and large, people are both blindered and innumerate. Folks who’ve never experienced living with different currencies just have no natural way think about the differences. Until somebody (including Professor Experience) teaches them.
Of course the problem is worse when different currencies at different exchange rates use same name e.g. “dollar”. That’s another opportunity for the mostly-clueless to assume the same word must refer to the same thing. It doesn’t.
Many countries experienced a lot more inflation, especially during war times. France divided its currency by 100 in, I think, 1960. The war had left it as about Fr500/ and that changed to Fr5/. Even four years later in 1964 many French would insist on stating prices in old francs. I recall one gas station asking Fr5000 for a tank of gas.
After I moved to Montreal, my mother and step-father would visit and my step-father would insists on giving me a $US for every $CDN I gave him. He said, “A dollar’s a dollar”. I tried to get it back to him in other ways. It might have been different if Canada had used pounds.
I don’t know; I’ve encountered it quite often. “I’m visiting ____. One dollar is worth X ____s, so I’ll be able to afford a lot of souvenirs”. There is, in practice, some truth to it, since countries that have experienced high inflation in the past also often tend to have an artificially-set exchange rate, but there’s no reason it must always be true.
On the question of “purchasing power”, I always wonder about news articles one reads from time to time about impoverished countries, with some statistic like “The median income in Gomboolistan is four dollars per month” or “The average income for non-government workers in Inner Slobbovia is five hundred dollars per year”. Note, the figures are always stated in dollars. Maybe that’s supposed to help us innumerate Americans “relate” to the number.
But how does one survive on such scanty income as that? Obviously, the purchasing power of that many dollars (equivalent in their own currencies, of course) must be very different than what we are accustomed to.
Portfolios of the Poor: How the World’s Poor Live on $2 a Day
When they can afford a meal, which isn’t every day, they live on rice and beans and little else (or whatever full protein combination is locally available). They live densely packed, with family, in hovels that also contain many other families. They have complicated credit arrangements in their community to compensate for irregular incomes.
That “$2 a day” is an attempt to compensate for local purchasing power. You can think about US prices. For example, you can order in the US a 20 pound bag of rice for nine bucks, for a total of 32,320 calories. You can get an 8 pound bag of beans for seven bucks, for another 9,360 calories. That’s 41,680 calories total for sixteen dollars. Assuming 2,000 calories per day (which is an optimistic diet), that’s 20 days worth of food. Beans and rice both, complete protein. They will eat other things, but obviously total variety will be less. And this is obviously not a perfect conversion, but 20 days worth of work at two dollars a day is 40 dollars of income, which is enough to pay for that food.
Assuming living arrangements are cheap enough. Assuming they don’t need medical care. Assuming they can afford the fuel to cook the food. Assuming the work is steady and reliable, instead of intermittent. Assuming they don’t get robbed. Assuming the people they lent money to in the past will repay that money. Desperately poor people are likely to have a web of credit arrangements more complicated than that of a middle-class American, because they have pressing need to compensate for the irregularity of their incomes in order to afford to eat most days.
Are those “Two dollar a day” societies largely barter economies?
In Thailand, wages are about one-tenth (or somewhat more, and for Western expats much more) what they are in the U.S. across a range of occupations. Commodities and land may cost about the same as in U.S. Fuel costs more; groceries perhaps half-price or less. Thus prices can be estimated based on how much local labor the product represents. Labor-intensive services (healthcare, restaurants) are much cheaper in Thailand, though McDonald’s isn’t. (Hence the BigMac measure is inappropriate.)
Thailand joined WTO in 1995; before that imported goods were often very expensive. In the mid-1980’s Macintosh computers retailed in-country cost about ten times the U.S. price (though they came fully loaded with pirated software 
); with a 10:1 wage ratio, this could lead to a 100:1 difference in the hardware/software cost ratio!
No.
For an example of one of the families surveyed from the book, where the main breadwinner Hamid drives a motorized Rickshaw:
Emphasis added. Other families surveyed are similar. Hamid worked a job for wages, specifically, a cut of the rickshaw fares. Hamid and Khadeja each lived on around 1.15 a day. Again, this is going to be a very rough conversion that we shouldn’t totally trust, but we should remember that anything above barest subsistence is survivable. While they were poor even among the people of their country, they weren’t the poorest.
To put a more positive spin on this: inequality is decreasing right now across the globe, and incomes are up. More people have been lifted from the most extreme poverty in the last few decades than has ever happened before in human history. Median income in Bangladesh is the highest it’s ever been, and is growing.
And a quick note about barter: although theoretical economists like Menger dreamt up stories that barter economies preceded money, modern anthropologists doing direct research paint a different picture. Rather than bartering this thing I have for that thing you have, which requires an unlikely double-coincidence that we each want what the other has, people without money had a smarter and more reliable system: they built up a complicated series of interpersonal obligations. A sort of debt-based economy, where everyone does favors for everyone else, like lending objects, while (very important) also keeping keep track of who’s reliable in returning favors and who isn’t. Although the rural poor are more likely to grow their own stuff, and so less likely to be totally reliant on monetary systems, that doesn’t mean they make a habit of barter. Chains of favors and obligation are more the rule.
I was reading an article about the poor of Cairo, and they mentioned a fellow driving a microbus earning LE25 a day. That’s about $4 a day. (6 or 7 LE to the dollar) That was barely enough to survive living in a shack. The basic food supply matches the wages, or elese everyone is falling down dead. They economize in other ways - overcrowded shared housing, government or church/mosque largesse, charity. It’s not that prices meet wages so much as wages meet prices, or people would not survive.
When I’m touristing, I use a 1-digit conversion fact or a fraction if applicable to find the price in money I’m familiar with. 80LE or 80 yuan for that souvenir? Divide by 6, that’s about $13. For Australia, when it was 90 US cents to the dollar, it was easier - OK, it’s $A45 - subtract 10% or $A4.50, that’s $40.50US. Israel, about 4 to the dollar, so 1/4 - the guy who wanted 80 shekels was asking $20 for that souvenir. You just need the rough math unless you’re on a tight budget. Am I spending $8 or $25 for that “silk” scarf? (I found the prices in Istanbul exorbitant, they wanted $80 for some silk scarves, my wife passed on those. They were very nice, but not $80 nice.)
Basically, for western amenities, the prices are the same all over the globe - whether it’s “big mac” index, or the latest tech from Sony or Samsung, or a car from Toyota. Unless the local government tacks on serious import duties, these things cost the same all over the world.