Consider this statement: "It usually takes more than 120 yen to buy 1 U. S. dollar and more than 1.5 dollars to buy 1 British pound. These values show that the United States must be a much wealthier country than Japan and that the United Kingdom must be wealthier than the United States." Is this reasoning correct?

Question

Business

Kristin Barron

4 April, 07:06

Consider this statement: "It usually takes more than 120 yen to buy 1 U. S. dollar and more than 1.5 dollars to buy 1 British pound. These values show that the United States must be a much wealthier country than Japan and that the United Kingdom must be wealthier than the United States." Is this reasoning correct?

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Answers (1)

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Agustin Caldwell · Answer 1

The statements here are not correct.

Explanation:

The statements here are not correct. Let take an example of Mc Donald's Big Mac Burger. Let say you need to pay 1 USD to buy 1 Big Mac in USA. For the same Big Mac in Japan, you need to pay 130 JPY for it. So, the exchange rate is now USD/JPY = 130 (in fact exchange rate in purchasing power parity is based on a pool of goods rather than single one).

The exchange rate only reflect to conversion rate between two currencies so that the amounts in both countries can buy identical products.

Weath of countries, in fact, is measured using GPD per capita or national disposible income.