During my last trip, I traveled in Bolivia for two months, and I was struck seeing how life was cheap there, from a European point of view. I believe that is the same in the great majority of the "developing countries". Food, transportation, hotels, even the touristic tours and attractions are cheap.

But people there might never have the chance to travel because Bolivia is among the poorest countries of South America (if not the poorest). Even the middle-class citizens (if there are such...) would have to pay a lot to buy a plane ticket to anywhere in the world.

My question is: What would happen if a unique global currency were established AND that the economic systems of all states were "balanced" (?) so that anyone in the world would benefit from an equivalent purchasing power?

I'm not talking about some kind of communist ideal where everyone would earn the same salary and all: let's keep the social classes, the competitiveness, etc. for this hypothesis.

The question must have been asked already, but I am a biologist, and a true newbie in economics. So if you could try to answer with simple/simplistic ideas, that would be great!

  • $\begingroup$ The problem for poor countries is not that their currencies lack purchasing power, but rather that they cannot produce enough valuable goods and services. For example, the fact that Zimbabwe uses USD as their official currency doesn't make their people much better off. $\endgroup$ – Herr K. May 17 '18 at 15:11
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    $\begingroup$ But what about trying to balance the value of things? I mean, I know that a unique money wouldn't do much: life in Denmark is more expensive than it is in France, but it the same currency. When I buy the newspapers in France, there's the price for France and other countries in UE, which isn't the same! How about making it the same price for Italy, Belgium, Spain (I chose close countries to France cause you'd have to consider the shipping price for further countries). $\endgroup$ – dlmr May 17 '18 at 15:18
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    $\begingroup$ You can look at the Euro system as a short answer to what happens when you have numismatic integration without real economic integration, and the stress the strong common currency has caused to the southern economies $\endgroup$ – jaamor May 19 '18 at 14:37

This is a pretty big question, and there are a lot of debates about it. I will attempt to give a partial answer.

The first issue: how are exchange rates determined? There’s a lot of theories in economics, but from the standpoint of a financial market practitioner, it’s not clear how useful they are. If we have a freely-floating currency (no peg to something else), all we know for sure is that the volume of sellers has to equal buyers. The key point is that international transactions are generally not to buy coffee in a local cafe, rather to trade goods and services, or buy financial assets. The price of a currency is driven by the relative attractiveness of a country’s exports and its financial assets.

Take Canada/US. Huge cross-border trade, similar economic structures and standard of living, and some people even go across the border to shop. Even so, the exchange rate can be relatively volatile, sometimes moving by 50% over a few years. The standard of living in common currency terms changes a lot, which tells us that currencies do not act in a way to balance out standards of living.

Currency pegs are put in place by a central bank buying or selling its currency to hold the exchange rate constant. It has to cancel out imblances in transaction flows. It has no problem selling its currency, but buying is a problem. It needs gold or foreign currency to buy its currency; when it runs out, the peg breaks. (This is a high level summary of how the Gold Standard failed.)

The way to stop this is have a common currency (like the euro). The issue is that currencies are not lumps of gold, they are liabilities of some issuer. In Canada, Canadian dollars are a liability of a branch of the Canadian Federal Government, similarly for the United States. If you issue the currency, you control its supply, and interest rate. If you use the money issued by another entity, you lose control of your money supply and interest rates.

Most developed countries want to keep that control. The euro area countries granted that comtrol to the European Central Bank. One result of that loss of control was that Greece was driven into a depression, and could do nothing about it.

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Dlmr, the best way for me to respond is to explain how prices are relative to incomes (as well as them being dependent on the state of technology in a country).

There is an alternative answer in that it would be practically difficult to have a universal monetary policy. The reason why different currencies exist is because it is politically difficult to co-ordinate monetary policy across several countries, let alone the entire world. Because different countries have separate monetary systems, with different currencies, there end up being differences in how valuable each currency is. The value of a currency derives from how many goods and services that country trades with other countries (as Herr K. says, "poor countries ... cannot produce enough valuable goods and services").

In everyday life, people are generally not affected by prices in other countries. If a Coke costs double in an overseas country, so what? You don't go there often, so it shouldn't concern you. However, as with your holiday, people sometimes venture to a different country, and the exchange rate does make them think and wonder about why things cost less or more. The key here is that you only consider things to cost less or more because of your salary. The salary you earn is in a different currency, in a different country. Because it's in a different currency, the exchange rate affects what you can do with that money in a different country. But because you work in a different country, your employer will pay you what you need in order for you to live in your home country! (Employers don't generally think about it this way, but this underlies the level at which wages are set. Your employer will more likely observe the prevailing level of the wage for your type of job in the labour market and not deviate too far from that level.)

So, I struggle (because of what I've learnt in economics) to understand what a more "expensive" life is. A life being more "expensive" sounds as if the person is poor and cannot afford to have as much. It depends on what job they have. If they have a job that actually pays what you would think is a "lot" of money, but that enables them to pay for "expensive" things, that would in my opinion be normal for somebody living in that country. It just means that prices are higher, but it also means that wages are higher. Perhaps what is confusing you is that their money can buy more in a poorer country (in that case I refer you to my argument above that employers simply pay wages that are needed in order for their employees to live in their own country).

I believe that people living in a poor country generally can afford plane tickets, houses, food, etc. It's just that the strength of the currency they use is low when traded with other currencies.

Now, after talking about how prices are relative to incomes, I want to go back to the important proviso in the brackets in my first sentence. Technology can certainly account for differences in living standards across countries. For example, cell phones, laptops, cars, production processes, infrastructure, human expertise and business management are technologies that can be more difficult to implement in a undeveloped country, or they can be technologies that are still in elementary forms in those countries. This is a game changer, because technology has a big impact on livelihoods, and the ability of people to access the same quality of life as those in richer countries. This is maybe why you think lives can be more "expensive" - because the same level of technology take a comparatively larger proportion of those people's incomes.

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