Finance Fingers

Today, I’m diving into something that got me thinking during my recent trip to India. Have you ever wondered why the value of money changes when you go from one country to another? Like, a few years ago, 1 US dollar was about 70 Indian Rupees, but now it’s around 83 Rupees. It’s fascinating how currencies are rarely the same anywhere and how much the value of different currencies fluctuates.

What is Currency Depreciation?

Currency depreciation is when the value of a currency falls compared to others. Imagine you’re trading cards and if suddenly, everyone wants the card you have less and less, its ‘value’ in the trading world drops. That’s kind of what happens with currencies.

For instance, the Indian Rupee used to be stronger compared to the US Dollar, but over time, it’s gotten weaker. This change happens in what’s called a floating exchange rate system, where currency values shift based on various economic factors​​.

Why Does This Happen?

There are a bunch of reasons why a currency might lose on its value:

Economic Conditions: If a country like India has issues like high inflation (where prices of stuff keep going up) or a current account deficit (basically spending more on foreign trade than earnings), its currency might depreciate​​.

Inflation: This is a big part of it. Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Inflation means that things cost more than they used to, which can reduce the value of money. So if India has higher inflation, the Rupee could fall in value​​.

Interest Rates and Investment: Countries that are stable and have good economic policies attract investors. More investment = stronger currency. But if a country seems risky, investors might stay away, causing the currency to depreciate​​.

Global Prices of Stuff: Countries that export commodities like oil can see their currency values change with global price shifts. If oil prices rise, countries exporting oil might see their currency value increase too​​.

Political Stuff: Politics play a role as well. Political stability makes a currency stronger, but uncertainty or instability can weaken it. For example, the British Pound took a hit when Brexit happened (when Britain exited the European Union)​​.

PPP (Purchasing Power Parity)

A simple purchase at an Indian supermarket sparked a moment of economic delight and insight. I bought a pack of gum for 50 Rupees, which is roughly equivalent to 60 cents in the US. This price is strikingly lower than what we’d pay for a pack of gum in the US (when 60 cents is probably the cost of production for the gum, but high margins are a thing!). 

This difference in pricing leads us to the concept of purchasing power parity (PPP). PPP suggests that despite the equivalent value in currency exchange (like 80 Rupees for 1 US Dollar), the actual buying power of 80 Rupees in India is much greater than that of 1 Dollar in the US. This means that the same amount of money can buy you more in India than it can in the US.

It’s a fascinating insight into how the value of money can vary greatly between countries, affecting everything from the cost of everyday items to the overall cost of living. I was also extremely delighted that I got a pack of gum for the equivalent of 60 cents!

So, What Does It All Mean?

Currency depreciation isn’t all bad. It can actually help a country’s exports become more competitive. But it also makes imports more expensive and can scare off foreign investors.

With the concept of PPP, in India, certain goods and services may seem more affordable to someone from a stronger currency economy, while the inverse might be true for locals or those from economies with weaker currencies. Like converting 80 rupees for a dollar where the purchasing power of a dollar in the US is less than the purchasing power of 80 Rupees in India. 

Understanding all this is like solving a puzzle. It’s not just about numbers and markets. It’s about what’s happening in the world – politically, economically, and even socially. With that said, I hope you all found this topic interesting and dig deeper to see what you can learn about different currencies, and what interests you about them.