Say you have two countries A and B. Suppose we have a situation where country A's currency can purchase much more in country B than the other way round. What causes this phenomenen?

Is it possible to have a situation with two equally well off countries, but where one country's currency can purchase more goods abroad?

  • $\begingroup$ I think you need to change the wording of this question, since it appears obviously impossible. For simplicity, assume the exchange rate is 1:1. If you have 100 units of currency “A”, that is equivalent to 100 units of “B.” A person from A spending 100 “A” will get exactly the same purchasing power as someone from B who exchanged for 100 units; and the exact same is true if we flip to looking at purchases in country B. $\endgroup$ – Brian Romanchuk Jun 16 '19 at 12:49

Well in principle you could. Let's suppose there are two countries that do not trade a lot. Then even if their economic growth is relatively similar, we should not expect their exchange rate to be 1:1.

The exchange rate is a price, so if country A likes more the goods and services from country B than vice-versa, you should expect currency B to have a larger purchasing power than currency A.

However, The demand for goods from abroad is correlated with income, so if both countries have relatively similar economic growths, and they trade a lot with each other, the relative purchasing power of their currencies will tend to be similar.


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