It’s January, and all the holiday-goers have started to return from their package tours to Thailand: blissful, tanned, and reeking of garlic. Also: loudly advocating the opportunity to get a tailor-made silk suit for the cheapness of chips.
The question is: why? Because surely, as general believers in fairness (and online shopping), we generally expect most things to cost around the same wherever you go, with maybe some differences for transport costs*. And everything else should be adjusted for through currency fluctuations.
*For example, Maple Syrup should be cheapest in Canada, where it is made.
The theory is:
- If, for example, clothes are cheaper to make in Thailand, then businesses should import Thai clothes rather than source local clothing.
- In order to buy the Thai clothes, importers will buy Thai bahts in order to pay their Thai suppliers.
- This increase in demand for the baht will cause it to strengthen.That is, it will appreciate in “price” relative to the home currency of the Rand importer.
- But as that happens, Thai goods become more expensive in Rand terms – and that should, in theory, continue until the South Africa importer becomes indifferent between local-is-lekker clothing and Thai imports.
But that’s not what happens (at least, not in the short or medium term). And the main reason for that is not ‘transport’ and ‘tariffs’, which would cause permanent/structural pricing anomalies.
Instead, I’m going to quote Ha-Joon Chang (who writes great pop-economics books that you should all check out):
“Why are there such huge differences between the things that you can buy in different countries with what should be the same sums of money? Such differences exist basically because market exchange rates are largely determined by the supply and demand for internationally traded goods and services (although in the short run currency speculation can influence market exchange rate), while what a sum of money can buy in a particular country is determined by the prices of all goods and services, and not just those that are internationally traded.”
That is:
- London is not expensive because the pound is strong. London is expensive because the cost of living in London is high. As are London salaries. Lots of rich people in one place drives up demand, which drives up prices.
- And Budapest is not cheap because the forint is weak. Budapest is reasonable because the cost of living in Budapest is quite low relative to everywhere else.
So when you’re planning your next holiday, look for destinations based on a cost of living index.
Just saying.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
