What happens to goods/services when the Euro is higher than the US dollar?
When the Euro is higher than the US dollar,
what is more expensive to buy in Europe and what would people buy more of? Euro goods/services or US goods/services
and what is more expensive to buy in US? Euro goods/services or US goods/services
Extra tags:
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Tagged with: Europe
Filed under: Currencies
Well, let’s see. When one currency rises relative to another, it takes more of that currency to buy goods denominated in the other currency — i.e. the local price increases. Do you think people will buy more or less of something that has increased in price? Do you think they will substitute more of less of the goods that have not increased in price?
It is the comparative difference in change between the two currencies that counts and not their absolute values. Suppose a car costs USD 30,000 but in Euros its cost is 15,000 and their exchange rate was exactly 2 USD to 1 Euro. Then the car costs the same in both kinds of currency.
But as the number of dollars per Euro grows (due to the Euro becoming higher in cost), then before any changes in the prices are made, the cost in Dollars is less than in Euros, regardless of what they were previously worth to each other. Thus it is the relative change that counts not the absolute values.
Clearly in the above example, the same goods/services would have their prices adjusted to suit the new exchange rates and depending on where the customer lived it would be either more of less expensive to purchase the car after the price was adjusted. In the US a more expensive Euro drives the consumer towards the cheaper home product but in Europe the cheaper Dollar encourages more importation of the lower costing goods/services.