ELI5:Why is the British Pound always more valuable than the U.S. Dollar even though America has higher GDP PPP and a much larger economy?

blipsman · 2時間前

It's like deciding whether to cut a pizza in 8, 10, or 12 slices. So the U.S. is a large pizza cut into 12 slices and Britain is a medium pizza cut into 8 slices. Each individual slice might be larger on the British pizza, but all the slices together are more on the American pizza.

The percent in change in value over time is more important that the absolute numbers at a specific time. Each country can decide how much currency to issue, and that will impact its value. Is the pizza growing or shrinking, vs. is it getting cut into more or fewer slices.

baildodger · 3時間前

Value of currency is relative, and doesn't really mean much. A quick Google tells me that in 2015 the average UK salary was roughly £27,000, the average US salary was roughly $44,000, and the dollar was worth on average £0.65. If you apply that exchange rate to those salaries, they come out pretty much the same, meaning that the average wage was worth the same amount, but the Americans got more individual units of currency. Both are worth the same in the international market, and both probably have pretty much the same buying power in their respective countries.

Surkiin · 3時間前

A lot of the value of a currency was simply made up. When money was still linked to precious metals the UK decided to make £1 worth 7.3g of gold while the US made $1 worth 1.5g. It didn't really matter that £1 was worth more than $1 as prices just reflected the amount of gold something was worth.

Since currencies are no-longer linked to precious metals the pound still has a higher numeric value because of that history, but proportionally it's lost more of its value than its earlier gold value so really it's become much weaker relatively (£1 used to be worth $4.8)

Now of course in general the numeric value doesn't matter, only whether the value goes up and down compared to other currencies - $1 is worth 100 YEN, but people have 100x more YEN so it's a bit like if the dollar were abolished and everyone just paid by the cent instead (you'd have a 1,000¢ bill instead of a $10 bill etc)

-/u/brainflakes, 2015

Echo33 · 3時間前

The relative value means nothing. One US dollar is worth 114 Japanese Yen, but that doesn't mean that the US is 114 times more awesome than Japan or something. It's totally arbitrary. Tomorrow the British government could decide to change their currency to a new one, called the British Dollar, where every British Dollar was worth 100 of the old pounds, and everyone could trade in their old money for the new money at the standard rate. This wouldn't change anything.

zeiandren · 2時間前

It's not like there was some start point where the dollar was worth one dollar and the yen was worth one dollar and the pound was worth one dollar and the lira was worth one dollar and the peso was worth one dollar and then everything drifted, everything was just worth whatever the system each country came up with, then over time they have drifted from those random starting points.

Dvanpat · 38分前

No one has mentioned that it's because the Royal family (aka the Reptilian Overlords) control the entire world from Buckingham palace.

alexander1701 · 3時間前

Currency value isn't based on how good or bad a country is, but how many people buy and sell that currency every day. Currency is like any other good, and it's value is controlled by the market forces of supply and demand.

If you want to buy a good in Britain, you have to pay in Pounds. That means that if I'm an American looking to buy something made in Britain, I have to find someone British who wants to buy something American and trade money with them. There are people who's whole job is buying and selling money.

If Americans want to buy 10 million pounds every day and the British want to buy 10 million dollars, then the trade is pretty straightforward. You might ask for two dollars for your pound, but then 5 million pounds don't get traded, and those buyers have to offer a better price - they'd bid maybe 1.5 dollars per pound and hope more Americans try to buy.

The reason the Pound is worth so much is because of that trade balance. When you go to market, that's what people need to bid to be the ones who get the pounds that are available to trade that day. In practice, these prices are set by bidders from all over the world buying and selling all kinds of currency, but the basic market forces are still the same - if Britain started to import more goods, the Pound would go down a bit in value because Britons would be buying more foreign currencies. When Britain exports services or the Pound is used as an investment currency and lots of people are buying it, the value goes up. Like with all goods, the total supply also influences the price. Because there are relatively few Pounds, they're hard to come by, so their rarity drives the price. That isn't the only factor that goes into pricing.

This system was engineered to stabilize industry and currency values by lowering the cost of production in countries with high imports. The idea is that if your country is routinely importing a lot and rarely exporting, you'll be buying a lot of foreign currency and every day those imports will get more expensive until local goods are cheaper again. On average, this means that a good should cost about the same anywhere - that is, a pint in London should cost the same number of US Dollars as a pint in New York because they use the same factors of production. In practice, banking transactions are often a high-level trade which can support trade imbalances in other areas, particularly in 'safe haven' currencies. No joke, the Big Mac is used as the standard to evaluate currency trade health. Most notably, the Swiss Franc is considered to be strongly overvalued, as it's purchasing power within Switzerland is well below it's price. For example, a Big Mac costs $4.93 USD on average to buy in America, but because of the overvaluation you would have to spend $6.44 USD to buy enough Swiss Francs to buy a Swiss Big Mac. The Pound is considered undervalued at the moment because it would only cost $4.22 USD to buy a Big Mac in Birmingham, meaning that it would be profitable for American traders to do more business with Britain.

So, you should expect the Pound to go back up in value relative to the US Dollar at some point in the near future. Currently, it's purchasing power denotes that it can buy more things in Britain than it's equivalent value of US Dollars could at home. It's value is a product of trade balances, quantity available, and Britain's place in the global banking and investment world, as well as what Britons value it at at home.

avapoet · 41分前

STORY ONE

Suppose there are two kingdoms, next door to one another. The first kingdom uses Orangreds as currency. The second uses Periwinkles. Suppose you live in the first kingdom: what does a loaf of bread cost you? Well: that depends on many things - it depends on how much grain there is, how competitive the bakers are, what the cost-of-living is (how much people of the kingdom have to pay in taxes, etc.).

But let's say that a loaf of bread usually costs about 3 Orangereds. And because you're close to the border, you notice that your neighbours only pay 2 Periwinkles for their loaves of bread. Are they getting a better deal than you?

There's only one way to find out: you walk over the border and go to a baker. He won't accept your Orangereds, so you go to a moneychanger. The moneychanger offers to change your Orangereds for Periwinkles, but to get 2 Periwinkles... he wants to charge you 3 Orangereds... plus a commission of 0.5 Orangereds, for his trouble. Damn: your bread's no cheaper in the second kingdom than the first - in fact, it's more expensive! It doesn't matter that a loaf of bread "only" costs 2 Periwinkles when it costs 3 Orangereds, because each individual Periwinkle is worth more than each individual Orangered. But people in the first kingdom (assuming that they're equally affluent, on the hole) have more Orangereds than their neighbours have Periwinkles, which compensates it exactly.

In the same way, it doesn't matter that a British pound is worth the same as about $1.40 USD or about 150 Japanese Yen or whatever else you measure it against: it's a completely arbritrary number. However, as we'll see in the second story, it's the way that the values of the currencies change relative to one another that matter:

STORY TWO

The king of your kingdom is mad, they say. He's building huge statues of himself in every village, and he's bankrupting himself by doing so. At first, he just tried printing more Orangered coins in his mint (he's the king, after all) to pay the masons, but as they got richer and richer they started charging him more and more (after all: they didn't need the money so much now that they were wealthy, so they put up their prices), and the rich masons started buying more luxury goods, like cakes, making the bakers richer too (so they put their prices up as well!), all of which made each individual Orangered worth less in the eyes of the people. Nowadays, people who drop a single Orangered on the street don't even bend down to pick it up! Not like when you were young! (This is called "inflation", by the way, but it's caused by lots of different things: not just mad kings!)

So the king tried a new strategy: he raised the taxes. Now, instead of having to pay him 1 Orangered out of every 10 that you earn, you have to pay him 2 Orangereds out of every 10 that you earn. It worked, at first, and the king started gathering lots of money to pay the masons to keep putting up the statues... but the people aren't happy. With more of their income going to the king, there's had to be some belt-tightening, especially among the people who were poorer to begin with. You've heard tell of people who've gotten so sick of it that they've moved to the next kingdom over to start their lives anew, so you decide it's time to give it a go.

You sell your house for 10,000 Orangereds and trek across the border, looking for the moneychanger you met the other year: he was trading 3 Orangereds to 2 Periwinkles (for a commission), which sounds like a pretty good deal nowadays: anything to get away from the mad king and his expensive statue-building habit. But when you find the moneychanger, he's not upholding that deal any more. With so many people emigrating to his land and trading-in their Orangereds, he has more Orangereds than he knows what to do with! Nobody's buying them from him, so he's reluctant to buy them himself! He offers you just 1,500 Periwinkles for your 10,000 Orangereds, and you feel thoroughly robbed. What went wrong?

What you're seeing here is the value of currencies fluctuate relative to one another, which happens all the time. When there are just two countries, it's very simple to see the cause-and-effect for them: the mad king's spending spree causing inflation and his new tax policy causing emigration is a clear cause for this particular spike, for example! But when they are hundreds of countries, the knock-on effects are immense. Everything stays pretty-well in check, because any disbalances "fix themselves" as investors buy and sell currencies and invest in particular countries (so you'll never be able to make a profit by selling Orangereds to buy Periwinkles, selling Periwinkles to buy Bitcoins, then selling the Bitcoins to buy Orangreds - at least, not all in the same afternoon!). But it's complex.

In our real world, for example, an earthquake in India might cause foreign investors to cancel plans to buy stock in affected Indian companies, resulting in the value of the Rupee to fall relative to other currencies. Perhaps this'll cause some Australian companies to switch their suppliers from the Bangladeshi ones that they were using to their Indian counterparts, because the exchange rate now makes it cheaper for them to do so: this results in a glut of Australian dollars pouring into India that would previously have gone into Bangladesh, resulting in the Bangladeshi Taka falling in value and the Rupee stabilising. What actually changed here? For most people: absolutely nothing... but if you happen to be a trader working across the India/Bangladesh border, it might make a huge difference to you!

tl;dr: Relative differences are relative; their absolute differences make no difference. Currency fluctuations are complex, but it's the fluctuations (the relative changes) that people invest in, not the values (the absolute numbers).

Schytzophrenic · 1時間前

Tomorrow, the US can decide to create the currency of superdollars and set it equal to $2. Then, 1 superdollar would be worth more than £1. What's more important is when currencies fall with respect to each other - like how the Euro started out being worth more than the $, now it's reverse.

beenthereonce2 · 28分前

Isn't the answer simply that the pound always has been bigger than the dollar? Theoretically it could decline to where it's less than the dollar. IIRC in the 1960s the pound was worth 3 dollars or thereabouts.

oxeimon · 15分前

Here's a question - why did you choose to compare the Pound to the Dollar? Why don't you instead compare the Pound to the US quarter, or the 50 pence coin to the Dollar? The "Pound" and the "Dollar" are just arbitrary units. It's like comparing centimeters to inches. Would you ask why a centimeter is less than an inch?

gavlarrr93 · 2時間前

A PS4 cost $399 or £399 Same with Xbox, same with a lot of things You guys often get a better deal

_Darren · 1時間前

Because there are less pounds. If you kept printing a lot of pounds, soon the pounds and dollar would be equivalent in exchange. Has no direct effect on economy.

PoliticalDissidents · 30分前

Because of supply and demand. There's less Pound's in circulation relative to their demand. Where as the US Dollar has more dollars in circulation relative to the demand.

It really doesn't hold any significants as to the value of a unit of currency as it is just that, a unit. What matters is the value of a unit relative to its economy and the fluctuations between exchange rates. You won't see GBP go below USD unless there is both a loss of confidence in the GBP and if the Bank of England increases the supply of currency, the former likely triggered by the later.

michaelchirico · 2分前

The really confusing thing is that the units for pounds and dollars are similar, so we actually might be tricked into thinking "1.4, that's higher than 1 -- we must be losing out!". But it's just not so simple, and the cross-sectional value of the currency means next to nothing for comparing two currencies' value/buying power.

When you get a bit further afield, you get to currencies whose exchange rates are nothing like 1:1, and come down on either side of the 1:1 ratio. One dollar buys about 1,200 Korean Won but only .38 Bahraini Dinar.

skipity1 · 1分前

Most of the answers here are wrong.

Fact is that the nominal price of a currency has nothing to do with it's value.

So for example:

There are 113 Yen to the Dollar. There are 3.6 Brazilian Reals to the US Dollar. This tells you nothing about the relative strength of the countries.

The "price" of the pound only has to do with it's history: when the currency was first issued, what it was pegged to (like silver, or nothing at all), and the economy as a whole.

Another comparison would be Berkshire Hathaway vs apple stock prices. Apple has split their stock many times, BRK never has. BRK is 210,430 per share, apple is 102.62 per share. But Apple as a company is worth 2 times what BRK is worth. The nominal price of their stock, like the price of a currency, tells us nothing by itself.

kutuup1989 · 2016-03-14T17:34:02+00:00

Something that nobody seems to have touched on is that the supply of a currency is also a factor in its value relative to another currency. There are far more USD in circulation than there are GBP. A commodity in shorter supply than another similar commodity will inherently have more value; it is easier to come across 1 dollar in the world than it is to come across 1 pound after all.

explainlikeimfive

important information

調停者

STORY ONE

STORY TWO