Why are different currencies able to purchase different amounts?

Question

I am baffled by this for so many years! Kindly, explain this in layman's terms (i.e. to a guy who never studied economics at a university):

I can purchase one dozen of eggs for €3.52 in Frankfurt, Germany but for ₹66 in New Delhi, India.

If I am living in India, I am in double trouble:

1. Why is the price of goods higher in India than that of Germany with reference to people's income level?
2. An employer is paying me such an amount of money (say,₹10,000 ≈ USD 152.52) which apparently looks larger, but in actuality, I am earning much lesser than that of a German guy (say, €1000 ≈ USD1173.96). Why am I earning less?

So, what factors make this difference?

Answer 1

This adds to the other good answers already posted:

Different prices in different countries are a result of complex factors, which are hard to explain in one, simple way.

An example: the housing prices in Sydney are extremely high compared to Frankfurt, with the reason being the high demand of housing vs housing supply, and the lack of adequate public transportation. This is not connected with the salary you might earn in Sydney, but rather with the housing market itself. The same applies to eggs, as highlighted by mootmoot.

If you want to compare costs of living, there are some nice tools like Numbeo that compare a basket of goods between different cities.

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Regarding your later comments on "maintaining currencies that are a false measure of wealth":

This is a different question already. Exchange rates and valuation / devaluation of currency can be influenced by the central bank of a country, with different aims. Many countries artificially devaluate their currency to make their exports cheaper - with a consequence that national wages are lowered compared to the rest of the world. See my answer here for more details.

Answer 2

Let EUR 1 = USD 1.17. Also, let INR 1 = USD 0.015 (these are the actual figures reported by Google on 10/2/2017)

Before we can make any meaningful comparison, we need to express the values of the dozen of eggs in a common currency. For simplicity we choose as that common currency the USD.

1. A dozen of eggs in Frankfurt cost USD 4.142
2. A dozen of eggs in Delhi cost USD 0.99

How did we get the USD equivalent prices?

It's straightforward: we multiplied the price of the commodity (dozen of eggs) denominated in some currency (EUR or INR) with the price of that currency denominated in USD.

Therefore, the price of a dozen of eggs is lower in Delhi than it is in Frankfurt, when the common currency in which the prices are quoted is the USD.

Let's turn now to the compensation figures:

1. wages of INR 10,000 are equal to USD 152.58
2. wages of EUR 1,000 are equal to USD 1,170

A employee in Germany can afford to buy 282 dozens of eggs while an employee in Delhi can afford to buy 154 dozens of eggs (divide the wage figure in USD by the price of the eggs again denominated in USD).

Therefore, if we are quoting wealth in terms of dozens of eggs that can be bought, then the employee in Germany is 1.8 times wealthier than the corresponding employee living in Delhi.

What are the contributing factors to this unequal distribution of wealth (measured in dozens of eggs-potentially-bought)?

There are three factors in play, namely

1. the price of the commodities quoted in domestic currency (ie the price level in eg Germay or India)

2. the price of the currencies quoted in USD (the common currency we used as a common measure)

   and lastly

3. the level of the compensation quoted in domestic currency that each employee can command, in different countries

Answer 3

The eggs vs relative income is a common economy thesis for production efficiency , market efficiency, good institutional control and low income in-equality. I wouldn't call this as "free market", as free market itself may introduce syndicate price fixing. FYI, 10pcs of eggs in Germany discount store is much cheaper €1.20 ~ €2.00

To a 1st world livestock breeder, here is the advantages :

• Technology such as advanced automated monitoring, better control use of biological control, source control, etc can reduce livestock fatality thus reduce cost and increase yield.
• Miminise wastage. Eggs that screen out from the normal process (color or deformed) actually will be cracked and pasteurized for food manufacturing.
• A good waste management will turn chicken waste to money
• Knowledge sharing and cooperative. Livestock breeders are not live in Island, they will share information. Small livestock breeders even cooperate and create cooperative union to share financial burden.
• Well establish sales channel
• Government policy is ready when livestock owner faced problem (e.g. compensation when there is bird flu outbreak, damage control over the egg issues,etc). There is law in place to prevent cartel like price fixing.
• Proper localisation policy in place. Germans growth some livestock feeds then relies heavily by imports.
• low income in-equality.

On the other hand.

• India has a huge culture problem that prevent cooperation among livestock breeders.
• rampant corruption culture mean bad execution on incentive, loan provisioning, subsidies distributions. Poor management and bad technique means smaller livestock breeders in India are more susceptible to heavy losses when disaster hits.
• Despite so call "free economy", there is a many oligarchy businessman cooperate with the local government, hampers the business.

With total landscape bigger than the whole West Europe, but poor government policy to manage the land, India is a livestock feeds import country. Besides India, there is many astonishing agricultural countries face similar issues.