Purchasing Power of Currencies

How strong is your currency?

Developed economies have higher-income people living in them, on average, compared to emerging economies. The aggregate demand curve in those economies is shifted higher than the aggregate demand curve in emerging economies. So, in an AD-AS model where price is denominated in a single currency, developed economies have higher prices for goods and services, i.e. the cost of living is higher in those economies. On the flip side, wages in those economies are also higher.

The aggregate demand curve is composed of consumer consumption, private investment spending, public investment spending, plus income from exports, minus the cost of imports. That is, C + I + G + X - M. The last two elements are known as the current account. South Africa has a current account deficit (the economy imports more than it exports), which contributes to the weakness of the rand. 'Weakness' refers to the real amount of goods or services that a currency can purchase abroad, compared to in its domestic economy.

The purchasing power parity conversion factor shows how many local currency units can buy the same amount domestically as one international $ can buy in the US, for a basket of goods and services that the International Comparison Programme maintains. The indicator for the PPP conversion factor is https://data.worldbank.org/indicator/PA.NUS.PRVT.PP .

For example, at the time of writing in May 2022, the USD was 2.27 times stronger than the ZAR:

nominal exchange rate / PPP conversion factor = strength of foreign currency

( R 15.77 / USD ) / ( R 6.96 / PPP$ ) = 2.27

Another example, between two countries other than the USA: The pound is

( R 19.69 / GBP ) / ( (R 6.96 / PPP$) / (£ 0.78 / PPP$) ) = 2.21

times stronger than the rand.


(November 2016)

Cryptocurrency financial market

In liquid forex markets, one unit of cryptocurrency would buy the same amount domestically as

the strength of the foreign fiat currency × one unit of cryptocurrency

would buy abroad.


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