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Thread: Understand exchange rates

  1. #1
    Senior Member Kuro2Flo's Avatar
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    Default Understand exchange rates

    I just want to see if the following is correct:
    Economic conditions effect the buying power of a currency, which is then compared against the buying power of other currencies from other countries. So when someone says the dollar is weaker than the yen, that means if you were to buy the same good or product in yen, you would be spending less than if you were to purchase that good in dollars? IE if you were to pay a dollar for a hamburger, you would only need to pay 77 yen, making the buying power of the yen stronger.

    Anytime I pay for anything in yen, I convert it into dollars in my head and realize I am spending way more for the same product as opposed to if I were to save the 800 yen on ramen, convert it into dollars, and have a decent meal somewhere in the states. Is this a correct way to think or is there something I'm missing.

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    Member privileged's Avatar
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    As usd/jpy falls, for example from 90 to 77, you are correct that the yen is strengthening and the dollar is weakening (or vice versa), but in my opinion this really only has meaning on a moving/comparative basis.

    Your question seems to use 100 yen as a "fair value" for $1, and therefore only 77 yen for $1 means the yen is strong. I suggest not thinking of 100 = 1 as a starting point, or fair value.

    Look at other currencies that are not around that level. eur/usd is usually well above 1 for 1, has been trading around 1.4 for months. In mid 2010 the euro dipped as low as 1.18 eur/usd. I believe this is around the lowest it has ever been. With one euro still giving you $1.18 is it still fair to call it strong? That is the weakest it has ever been.

    My point is just that "strong" or "weak" is somewhat meaningless out of context, and 1 = 1 should not be considered even.

    The fact that "fair value" is in fact incredibly difficult to determine is the reason exchange rates are constantly fluctuating.

    It is very hard to buy the "same product" in yen or in dollars. Are you shopping in Japan in each case? Are there transaction costs to change your yen to dollars? Are there export costs? What if you look outside Japan and the US at other countries, say struggling ones where basic amenities are lacking... Is the cheaper meal really cheaper there? How much do locals earn on average?

    I think it is easier to think comparatively, and more generally. Then yen is strengthening vs the dollar (and equally the dollar is weakening vs the yen). Japan dislikes this because they are an export based economy and the strong yen makes their exports more expensive.

    For teachers who might take a trip home, or send money home, it can be an advantage. If you live, earn, and spend in Japan, in my opinion it doesn't make that big a difference.

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    Senior Member Kuro2Flo's Avatar
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    I'm just wondering how they determine the "value" of a currency when comparing to other currency. The only measuring stick I can think of is buying power, or how much relative currency it would take to buy X good, and how much those goods cost in relation to what you would pay for it.

    According to the big mac index,
    Big Mac Index | OANDA
    a big mac costs 420yen ($4.16), while that same big mac in America cost $4.07, a difference of 9 cents. While the difference is negligible in the example, it will obviously fluctuate with exchange rate, and from good to good.

    IE I just bought a PC part for 31,000 yen ($405), while that same part only costs $289.99 from a vendor in the US. Normally I would have bought it in the states and shipped it, except for the cost of shipping plus the chance of a faulty part almost negates the extra $110 I paid for it.

    Anyway, it makes me sick to my stomach and I'm just looking for someone to lie to me and tell me its alright, or that there are other factors I'm not considering.
    F*ck.
    Last edited by word; September 24th, 2011 at 09:50. Reason: Appeasement.

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    Senior Member Jojo's Avatar
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    Default Re: Understand exchange rates

    The first thing you need to get your head around is that currency values are not objective (ie based on comparing values that are quantifiable) they are also largely based on subjective values - speculation ...
    The big mac index is (somewhat) useful in comparing if currencies are under or over valued - ie is 77 yen per us dollar accurate. If everything is equal (like macdonalds cost of production, wages etc etc ) in every country around the world (and its not) then a big mac should cost the same (after conversion) in every country. If it doesn't then the currency is over or under valued.. but the world doesnt work like that so its really just meant to be a guide..

    have a watch of this - its a really good series - the last part on copper shows you fucked up the current system we have really is

    BBC iPlayer - The Documentary: Bubble Trouble?
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    Member privileged's Avatar
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    Quote Originally Posted by Kuro2Flo View Post
    I'm just wondering how they determine the "value" of a currency when comparing to other currency.
    Free market, so whether or not you believe they are getting it right opens up a whole other can of worms... And I guess free market is debatable, as the Swiss gov't just pegged their currency to the euro, Japan has intervened a couple times to weaken the yen, obviously China's valuation is the subject of debate... but generally/theoretically, sweet sweet capitalism.

    Quote Originally Posted by Kuro2Flo View Post
    IE I just bought a PC part for 31,000 yen ($405), while that same part only costs $289.99 from a vendor in the US. Normally I would have bought it in the states and shipped it, except for the cost of shipping plus the chance of a faulty part almost negates the extra $110 I paid for it.
    I don't think it is fair to pick one thing and point out the difference. In my experience, Japan has this reputation for better and cheaper electronics, entirely unfounded. The mac I bought there was not as good as one I'd buy in the States, and more expensive. Why, I don't know. I understand that in general things are more expensive in Japan, but certain things are much more expensive. If everything were roughly an even X% more, that would be easy to understand, but I noticed odd items here and there are way more expensive, movies for one. There might be a great explanation for this but I don't know what it is, but anyway I don't think you can point at one thing being more expensive and extrapolate from there, and computer parts definitely fall in the odd category for me, given that plenty of Japanese and foreigners alike tend to think Japan is a superior place to buy electronics and I definitely disagree.

    As for exchange rates, super super complex. Central banks, governments, hedge funds, corporations, etc all have their own interests and opinions. Interest rate expectations is a huge part of it; the australian dollar has increased in value because they are one of the few central banks with a comparatively high and debatably increasing interest rate. Japan is generally weak because they have such a low rate with no intention of raising it. Then the US cut theirs to shit and started printing money left and right. This is at least part of the reason the dollar fell in value as compared to the yen. There are a million other reasons and I'm not sure anyone really understands a fraction of them...

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    magic markers Gezora's Avatar
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    Default Re: Understand exchange rates

    Regardless of exchange rates, shit costs a little more in Japan anyway for basically no reason other than consumers are dumb enough to pay for it. Hence 4,500 yen BluRay movies and 8,000 yen PS3 games.
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    Feckless Manchild Otaku word's Avatar
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    Quote Originally Posted by privileged View Post
    In my experience, Japan has this reputation for better and cheaper electronics, entirely unfounded...plenty of Japanese and foreigners alike tend to think Japan is a superior place to buy electronics and I definitely disagree.
    word

    I used to think this before I arrived here. I am now baffled by people who still believe this (after living in Japan for a year or more).

    Quote Originally Posted by Gezora View Post
    Regardless of exchange rates, shit costs a little more in Japan anyway for basically no reason other than consumers are dumb enough to pay for it. Hence 4,500 yen BluRay movies and 8,000 yen PS3 games.
    WORD. This. So many things seem to have a huge markup for no apparent reason whatsoever. I suspect that some of it is due simply the inexplicable inability of most Japanese to understand or effectively make use of the internet. I can think of no other reason why someone would purchase, say, a large LCD TV from an electronics store when they could purchase an identical model online for half the cost.

    As others have said, inside Japan, the exchange rate means absolutely nothing. The cost of basic commodities seems to reflect a value of 1:1 yen to dollar ratio... or worse (consider the fact that a bottle of Coke, which would cost about a dollar in US vending machines, sells for 150yen in Japanese vending machines.... or, the fact that a gallon of gas costs about 575yen here). This is caused by a variety of factors, but ultimately, these factors just don't really matter. Life is what it is here.
    Last edited by word; September 21st, 2011 at 11:36.
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    Default Re: Understand exchange rates

    Much of the difference in prices between Japan and America comes not from the relative buying power of their currencies, but both the social outlook towards various products and differences in trade, manufacturing and selling practices in both.

    There tends to be a stronger believe in the correlation that price = quality / desirability here. There are generally more middle men between manufacturer and seller. People don't always buy more than they need, even if the price is the same for both quantities. An aging, and more traditional, population.

    Etc.

    Factors like this make using the relative price of goods here and in America as a benchmark to determine if the exchange rate is accurate rather unreliable. No matter what the exchange rate is, the prices in Japan will generally be higher, especially for high-end & imported goods, because of social and industry factors rather than monetary ones.
    Last edited by WaIdroon; September 21st, 2011 at 13:55.

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    Senior Member Kuro2Flo's Avatar
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    Quote Originally Posted by WaIdroon View Post
    Much of the difference in prices between Japan and America comes not from the relative buying power of their currencies, but both the social outlook towards various products and differences in trade, manufacturing and selling practices in both.

    There tends to be a stronger believe in the correlation that price = quality / desirability here. There are generally more middle men between manufacturer and seller. People don't always buy more than they need, even if the price is the same for both quantities. An aging, and more traditional, population.

    Etc.

    Factors like this make using the relative price of goods here and in America as a benchmark to determine if the exchange rate is accurate rather unreliable. No matter what the exchange rate is, the prices in Japan will generally be higher, especially for high-end & imported goods, because of social and industry factors rather than monetary ones.
    Gotcha, I think this answered my question.

    All is can say is, that's fucking retarded.
    Fucking retarded indeed.

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