Alice and Bob both live in a country that has a very low cost of living (like India). They are entry-level software engineers straight out of college. Alice works remotely for a US company that pays, say 75k$ per year (average figure). After converting to her local currency, the monthly salary comes out to be ~ 57 lakhs rupees per year. Bob works for a local company in his country and his earning is 6 lakhs per year (again, average). So my questions are:
- Why isn't the dollar-rupee exchange rate such that Alice makes about the same as Bob does? After all, they have an equal skill level and contribute equally.
(IMO Alice has an unfair advantage just because she works for a US company. 57 lakhs would be an impossible salary for a fresher in India straight out of college, yet Alice gets it. For her, she enjoys a low cost of living while having a high conversion rate of the rupee from the US dollar.)
- If Alice's employer were to make some kind of adjustment in her salary to account for the lower COL such that after converting to rupee, Alice makes the same as Bob (6 LPA), isn't the employer getting away by actually having a lot of savings? If her employer were to hire Charlie, a US citizen instead of Alice, they would have to pay him way more than Alice. The question here is why isn't the exchange rate such that Alice's employer pays what they would to a US citizen (75k) and at the same time Alice gets about the same as Bob?
- This is more like asking the converse question: if Bob wants to avail a remote service from the US (say tutoring), isn't it too expensive for him, since he is earning according to the COL in India? Why isn't the exchange rate such that the tutoring fees are affordable to Bob and at the same time Bob's tutor gets what they would if they were to tutor a US citizen.
I have very little knowledge of economics and I ask this question more like an outsider. From this outsider POV, it seems the exchange rates should automatically fix this, but in reality, they don't. Something doesn't add up. I am not talking about unfairness in particular, but I would expect that equal work and skill would pay almost equally. The difference between 57 and 6 is really huge. So, does the exchange rate not account for the cost of living?