Global Business: Exchange and Value

Here you are, visiting the ever beautiful London, when you come across a shop with the most beautiful pair of shoes in the window. You notice they’re designer, vintage even, and in the perfect condition, and look, the price says £150. That’s reasonable you say, until you get to the counter to pay for the shoes, only for your mom to point out that £150, is actually $200 in U.S. dollars. This is called an “exchange rate”.

Often times, when you visit a different country, the exchange rate is not always the same. For example with London, since the country still uses the pound. However, with the rest of Europe on the Euro, the exchange between the US dollar and the Euro is almost equal most of the time. This means, that when you travel to Europe (basically any place but the UK) that the price you pay for a croissant, tee-shirt, or even a boat ride, is going to be about equivalent to what you would pay in America.

However, there is something called the “Law of One Price.” Let’s use McDonalds to explain this, and set the scene. You’re in China, and after a long day of touring around you spot a McD’s up ahead. A Big Mac sounds good to you right now, so you go in, and see that the price of a Big Mac here in China is about the same what you would pay in the US. However, the Law of One price shows a slight difference, meaning on the same day your Big Mac in China cost you 2.99 in Chinese Yuan, while it was 2.49 back in the States. By calculating the difference, the exchange rate figures out to be $1.51 in Yuan, and that the US dollar was overvalued, and the index should’ve read 1.23 in Yuan. This just goes to show you how even a product as universal as the Big Mac, isn’t the same everywhere, and the same goes for mostly every product on the market today.

So, why not get rid of country based currency and move it to one universal currency? In fact, this has been in talks for years between financial experts and domestic political heads. Just think , going to a country without having to first stop in the airport, exchange your dollars for whatever the currency is, and then having to figure out various conversions on whether or not something is priced accurately, or if its overpriced. Changing to one currency would eliminate foreign exchange fluctuations, minimize inflation, and stimulate trade and investment. However, these countries would then be tied to the US government to develop a regulated financial system, main budget deficits, and stop borrowing, which many countries in this day in age, are famous for.

What are your thoughts on having a universal currency? Is there another place like the United States you think we could use for the said universal currency?

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