why doesn't every country scale up the prices to the international level?

Economics Asked by Mahdi on September 21, 2020

I live in an Asian country in which the average monthly salary is maybe 300-400 dollars but things (apart from exported goods like laptops or smartphones) are reasonably cheap compared to their price in the US for instance.
One pizza is around 3 dollars, you can rent a decent hotel room with less than 20 dollars and average monthly rent for apartments in our capital city is around 150 dollars.
my question is why doesn’t our government scale up everything like 5 times so the pizza would cost 15$ but at the same time salary is 2000 dollars?
That wouldn’t make any difference for us but now our country seems to be a heaven for foreign tourists and I think this can make things better.
I know I’m not the first person that this idea has crossed his mind but can’t figure it out what are the technical issues which prevent this idea from happening.

One Answer

For simplicity suppose the local currency exchange rate is 1 LOC = 1 USD.

Suppose that the central bank simply print out 5 times the paper money in circulation, creating inflation. Pizza would then cost 15 LOC instead of 3 LOC. But then if the exchange rate regime is floating (majority of countries now use this), then the inflated money would be worth less, causing the exchange rate to fall to 5 LOC = 1 USD. That is, you need less USDs to exchange for 1 LOC. In essence, tourists would be paying the same (3 USD, which is now equal to 15 LOC).

So the next question is, why don't the central bank make their local currency appreciate (make 1 LOC = 5 USD, so that the pizza that cost 3 LOC would now be equal to 15 USD.)

Well, the demand and supply for money is what determines the exchange rate. If you want to know more about this I'd suggest you read more on exchange rate intervention here.

Answered by Art on September 21, 2020

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