We’re migrating some posts from the old economics forum to our blog. This is one from 2007.

I have been discussing with my friends on how some currencies compare against USD. For example, the Kuwaiti Dinar is the most expensive currency in the world (1 KWD = 3.55 USD = 1.77GBP).

Also, 1 US Dollar = 1.87208 Brazilian Real. However, before Brazil introduced new Real in 1994, you could get a lot more of the old currency for 1 USD. The new Real just divided the old currency by some factor.

So, just because a currency will buy you more dollars than another one doesn’t mean that economy of that country is better. It might be true in some cases but doesn’t have to be true all the time.

So, my questions is … since a British Pound is worth more than US Dollar … what does that say about the British economy compared to the US? Since pound is worth more than dollar there is just less pound to go around to balance it out?

A.

There’s not simple answer to your question. The pound is worth more because of its power, it can buy more goods. However, the change in prices as you see in say the real is due to a perception of supply and demand. When you revaluate or print new money there is an assumption the new money will be more ‘trustworthy’ than the old currency (or more specifically the new economy generally introduced by a new regime). This new ‘optimism’ can encourage investors (foreign investors) and thus increase demand for domestic currency. Right now America is tanking because people are opting for other foreign currencies and investments. That will change no doubt.