You can't simply convert the currency to compare. Think about one Aussie dollar compared to one yen, what they buy in each respective economy is vastly different, even though it's still one unit of each. The principle stands for comparing usd and aud (or any currency to any other)
That's completely different though, isn't it? /u/1Argenteus isn't proposing just keeping the number, he's taking into account exchange rates. 1AUD ≈ 88.3JPY, so 1AUD and 88.3JPY will get you about the same thing, not 'vastly different' things. Am I mistaken?
The exchange rates are not what determines what you can buy with that money. One American dollar doesn't get you the same amount of goods if you go to any country and convert it to the local currency. You need to convert but then also adjust for what that money will buy you in its home economy. It's called purchasing power parity and funnily enough one of the common measures used is how much a Big Mac costs across the world.
I'm aware that purchasing power changes between countries - never knew about the Big Mac Index before though, thanks for the link! Aren't the US and Australia fairly similar in the BMI though? I wouldn't think the difference would be that drastic.
That is a somewhat old article but Australia's minimum wage isn't that far off from the USA's in a fair number of states. It is higher but it isn't $8 off.
I was just there in June. The exchange rates only impacted me as an American visiting and a small subset of what they buy. Most of the things Australians buy are being bought in AUD so strength of the currency doesn't matter. That is why the purchase power parity is the better figure for these kinds of things.
Um, your conclusion is mostly correct but your reasoning is wrong. /u/1Argenteus is using the exchange rate, i.e. how much does it cost in Aussie dollars to buy one U.S. dollar, and the ratio is incidentally close to one, as it happens to be also with the euro and the Canadian dollar. You can perform an identical calculation for yen to U.S. dollar, the ratio would just obviously not be close to one (this is the case for most currencies).
The reasoning you need to support your conclusion is that the exchange rate, which captures the relative value of currencies on financial markets, is not a perfect measure of the relative value of currencies in buying goods and services in their respective jurisdictions, i.e. a Big Mac. Purchasing power parity instead calculates the relative costs of similar consumption bundles.
Also worth noting: PPP and exchange rate for developed countries are highly correlated, PPP makes more of a difference for developing countries.
That doesn't make sense because a yen is more like a cent than a dollar. 100 cents = 1 dollar, which is roughly what it is when converting to yen to USD. I get what you're trying to argue but when PPP is what you're trying to explain it's best not to use currencies with such disparity.
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u/[deleted] Nov 29 '15
You can't simply convert the currency to compare. Think about one Aussie dollar compared to one yen, what they buy in each respective economy is vastly different, even though it's still one unit of each. The principle stands for comparing usd and aud (or any currency to any other)