Is a country´s currency overvalued when the prices resemble those of a first world economy?

Question

I´m thinking of Brazil where the majority of people are really quite poor yet the currency is now 1.6 Brazil real to 1 US dollar which makes everything seem quite expensive. Certainly way dearer than most third world economies anyway. Is this sustainable or would such a country be heading for a devaluation?

Answer 1

1. The exchange rate does not mean very much by itself; and the prices in local currency don't mean very by themselves. It is the combination that does. An exchange rate of 1.6 Brazilian real to the U.S. dollar means very different things if the price of a pound of flour is 0.16 real vs. 16.0 real.

2. A currency may "overvalued" when just about everything is priced lower than you would reasonably expect, but the usual measure has nothing to do with retail prices but with long term trade deficits with the rest of the world.

3. In the case of Brazil, I would expect that some goods (particularly locally made, labor-intensive goods) would be cheaper than in the U.S. (after converting to dollars), while others (particularly imported goods of reasonable quality) would be more expensive (if only because of the smaller market).

4. Prices in Europe and Japan (i.e. most first world economies) are generally higher than than they used to be when converted to U.S. dollars. That is generally seen as a result of the U.S. dollar having become weaker, not their currencies becoming over-valued.

5. Countries with significantly overvalued currencies are generally pressured to devalue. But some have put it off for quite some time. In a world where everything changes, just what would it mean to be "sustainable"? Putting off devaluation for 10 years? possible; putting it off for a hundred years? much harder. But then, no would expect the world of 100 years from now to look much like today's, so ...