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Comment by kokey | Hacker News Reader

I'm surprised that how many otherwise smart people gets tripped up by this. The only time you can deduce something from the exchange rate is if you compare the difference between the two rates over a longer period of time. Then it can roughly tell you things about difference in direction of inflation between the two countries, and the effect on wages and imports/exports. If the difference between the exchange rate between two countries doesn't change for a long time the prices of goods in both countries end up being roughly the same.

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"If the difference between the exchange rate between two countries doesn't change for a long time the prices of goods in both countries end up being roughly the same."

Simply not true. Compare the cost of a beer in, say, Thailand and Norway. Are you suggesting if the exchange rate were fixed they would reach parity over time?

Compare the cost of anything in Norway, and well, anywhere else. Norway is one of the most expensive countries in the world for foreigners because of it's abnormally high average income.

Assuming no new disruptions, then yes, economic conditions in the two countries would eventually equalize and prices would differ by at most the shipping cost if one of the two countries happens to have much better natural conditions for producing beer than the other. It's because disruptions are now becoming (have become?) the norm that equilibrium never has time to come close to manifesting itself.

Alcohol is a poor example because of special taxation.

The Big Mac index is better for many reasons, one being Mcdonalds is large enough to mostly optimize everything wherever they operate:

http://en.wikipedia.org/wiki/Big_Mac_Index

I think it's a little more complicated than that. Culture plays a major factor, especially when it leads to niche markets. If a product has a niche demand in country A, and high demand in country B, then the cost in country A can easily remain much higher than the cost in country B. In addition to shipping cost being higher in that case (which is why that difference is hard to abstract away), you have to consider the opportunity cost of keeping it in inventory, the risk of spoilage if the product is perishable, the risk of depreciation if it's technology, etc.

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