Question

f the exchange rate between US and Iceland is 1 U.S. dollar for 100 Iceland Krona, the U.S. economy is stronger than the Icelandic economy, and U.S. consumers have 100 times more buying power in Icelandic consumers. Do you agree or disagree with the statement.

Answer 1

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The given statement is false because exchange rate does not translate to purchasing power.

In fact, there is a different metric called purchasing power parity which measures the relative purchasing power of different currencies in purchasing a basket of goods. One popular example is the Big Mac Index which is the price of the Big Mac burger at different McDonalds outlets across the world. This allows economists to compare standards of living between countries much more easily. This may not at all be represented by the exchange rate which mainly performs the conversion of currency to different units and nothing more. Thus the statement if the exchange rate between US and Iceland is 1 U.S. dollar for 100 Iceland Krona, the U.S. economy is stronger than the Icelandic economy, and U.S. consumers have 100 times more buying power than Icelandic consumers is completely false.