13 December 2006

The worth of a dollar

I was talking to a Brazilian friend of mine the other day and we got on the subject of traveling abroad. I mentioned that living abroad in Brazil is fairly easy on my American wallet. My friend said, "Well, that's because the Dollar is worth twice as much as Brazil's dollar [the Real]." In the context, I took my friend to be stating that the Dollar is "worth twice as much in Brazil."

I think that statement betrays a misunderstanding of worth. To be fair, both the Dollar and the Real have a "1" written all over them. And when you exchange the Dollar in Brazil you receive about 2 Reals. The problem with this logic is that for the Dollar to be worth twice as much in Brazil, it must give you twice the purchasing power. The problem is that it does not! The reason is that you are purchasing different products.

For an internationally available product such as a song from iTunes, the cost difference in Brazil will exactly equal the exchange rate between Dollars and Reais. Regardless of your currency you can buy the same number of iTunes. But for local goods that are subject to different marginal production cost, transportation costs and regulation structures, you are buying a different product. The fact is that in some cases these different products are more or less expensive than similar products in the U.S. Fruits, for example, are much cheaper while electronics are much more expensive in Brazil. So why don't we import Fruit from Brazil. We do. The main price difference is the extra transportation and taxation costs of importing it (even so it still cheaper than trying to grow it in the U.S.).

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