Each country has a unique currency with a specific value. It fluctuates based on trade, demand, productivity, and several additional factors. When you see the price of something in one country and compare it to another, you have a reasonable idea of knowing the differences in each culture.
The exchange rate doesn’t tell the entire story. An excellent example of this issue involves McDonald’s and their Big Mac burger. In 2009, you could purchase one in the U.S. for about $4.
It was about 80 baht in Thailand for the same item. That means it costs about 50% less compared to what Americans paid.
Why does this happen? It is a fundamental theory called purchasing power parity. Different economies have unique inflation rates, and separating the currencies ensures actual values are available to consumers.
Why Don’t We Have a Universal Currency?
The problem with a single global currency is that it isn’t subject to competition. There wouldn’t be exchange rate fluctuations or other monetary units to compete with it.
That means the money would lose its value as a commodity. The only value it would have is its ability to purchase other commodities.
Having a global currency would eliminate value risks in international trade. No one would need to hedge their positions. We’d see transaction cost improvements, easier purchases for international travel, and increased trade.
Countries like China could no longer use currency exchanges to make their goods cheaper.
The problem would be the loss of independent monetary policies. During the 2008 great recession, the United States lowered interest rates to unprecedented levels while increasing its money supply. These actions lessened the severity of the economic problems of the time.
There would need to be a central bank that regulated the printing and distribution of a global currency. The only way to eliminate bias would be to operate independently, making that organization in charge of international economics instead of each country.
It’s highly impractical to introduce a single currency. The hybrid approach creates competition, encourages trade, and focuses on the local economy. If you are looking to understand more about financial markets, check out these recommended books by Warren Buffet.