I'm surprised that how many otherwise smart people gets tripped up by this. The only time you can deduce something from the exchange rate is if you compare the difference between the two rates over a longer period of time. Then it can roughly tell you things about difference in direction of inflation between the two countries, and the effect on wages and imports/exports. If the difference between the exchange rate between two countries doesn't change for a long time the prices of goods in both countries end up being roughly the same.

"If the difference between the exchange rate between two countries doesn't change for a long time the prices of goods in both countries end up being roughly the same."

Simply not true. Compare the cost of a beer in, say, Thailand and Norway. Are you suggesting if the exchange rate were fixed they would reach parity over time?

Compare the cost of anything in Norway, and well, anywhere else. Norway is one of the most expensive countries in the world for foreigners because of it's abnormally high average income.

Assuming no new disruptions, then yes, economic conditions in the two countries would eventually equalize and prices would differ by at most the shipping cost if one of the two countries happens to have much better natural conditions for producing beer than the other. It's because disruptions are now becoming (have become?) the norm that equilibrium never has time to come close to manifesting itself.

Alcohol is a poor example because of special taxation.

The Big Mac index is better for many reasons, one being Mcdonalds is large enough to mostly optimize everything wherever they operate:

http://en.wikipedia.org/wiki/Big_Mac_Index

I think it's a little more complicated than that. Culture plays a major factor, especially when it leads to niche markets. If a product has a niche demand in country A, and high demand in country B, then the cost in country A can easily remain much higher than the cost in country B. In addition to shipping cost being higher in that case (which is why that difference is hard to abstract away), you have to consider the opportunity cost of keeping it in inventory, the risk of spoilage if the product is perishable, the risk of depreciation if it's technology, etc.

"but certainly I don't feel I have 100x in buying power"

Sometimes the economics do conveniently work out this way, which is why some people might get confused. For example I lived in Poland for a few years, and at the time a dollar got you about three zloty, and for the majority of day-to-day stuff you did indeed have about 3x the buying power. Of course for things like computers you ironically had about 1/3 the buying power.

Purchasing Power Parity (PPP) is a better measure

Yen is the equivalent of cents, not dollars, thats why the confusion, yen doesnt have a concept of 100 cents=1 xxx. In Rupees case it is an equivalent of dollars, 100 paisas = 1 Rupee.

So in this case 60x is a reasonable assumption except not including the Purchasing Power Parity.

if the same logic were true, cars would cost 1/60 of labor + reduced price on parts locally made + same price and import duty on imported parts. However cars typically cost twice in India.

Cars cost twice in India for a totally different reason. Its basically because of high import duty and not because they are expensive to make in India.

It's like measuring your penis in millimeters instead of inches to make it longer.

Zimbabwe is printing trillion-dollar bills, so everybody there must be rich....

I got to hold one of these Zimbabwean bills the other day. One hundred trillion dollars, IIRC. Pretty cool.

I hope you'll think of me when you're spending your new-found wealth.

Is it Zimbabwe that prints expiry dates on their notes? I remember seeing one African banknote that did this.

How did you get it? I'd like one too!

There are plenty of them on ebay.

In Japan $1 = 100 yen Is the Yen equivalent to the dollar though?(are there fractional yen cents and that kind of thing) I guess since the exchange rate has been around that for as long as I have been alive, I have always thought of it as 1 Yen = 1 penny.

> In Japan $1 = 100 yen Is the Yen equivalent to the dollar though?(are there fractional yen cents and that kind of thing)

Why is this relevant?

It isn't, it is just that when the exchange rate comes up it is always expressed as yen vs dollars when it seems yen vs pennies seems more appropriate, same order of magnitude and what not.