If 7 RMB buys 1 USD right now, and for the next 10 years USD inflates at 10% per year and RMB inflates at 1% per year, then by definition after those 10 years, 7 RMB will buy more than 1 USD, no? How could the difference between the two currencies' inflation rates not impact the exchange rate between the two? All else being equal of course - there are other factors besides inflation that impact exchange rates. Genuine question, I know nothing about finance, despite having gone to b*siness school
If 7 RMB buys 1 USD right now, and for the next 10 years USD inflates at 10% per year and RMB inflates at 1% per year, then by definition after those 10 years, 7 RMB will buy more than 1 USD, no?
No, because price levels are not the same across countries and they don't stay proportional over time. Currently you need about 4.20 RMB to buy an equivalent basket of goods in China than what 1 USD buys in the US, not 7 RMB. This measure is the "purchasing power parity" exchange rate, and is usually below the nominal exchange rate for imperialised countries and above it for the imperialist countries. The OECD has a table of the PPP exchange rate for several countries here: https://data.oecd.org/conversion/purchasing-power-parities-ppp.htm
It's an essential part of the unequal trade relations that keep globalisation going. In practice, when you travel to China, you'll notice that you can buy twice as much stuff there than what you could back home. And conversely, a Chinese person travelling to the US will find everything twice as expensive. These relations can change quite rapidly, for instance in Argentina we had a PPP exchange rate almost on par with the nominal in 2015, despite persistently high inflation, when the government managed to turn the country into one of the least indebted in the world, but immediately afterwards a rightist government took the biggest IMF loan in the history of the institution, defaulted on it, crashed everything and now the PPP is three times below the nominal exchange rate, and again an American can come over here and buy everything, like in that scene from Eurotrip.
Making up numbers for the sake of example:
If 7 RMB buys 1 USD right now, and for the next 10 years USD inflates at 10% per year and RMB inflates at 1% per year, then by definition after those 10 years, 7 RMB will buy more than 1 USD, no? How could the difference between the two currencies' inflation rates not impact the exchange rate between the two? All else being equal of course - there are other factors besides inflation that impact exchange rates. Genuine question, I know nothing about finance, despite having gone to b*siness school
Death to America
No, because price levels are not the same across countries and they don't stay proportional over time. Currently you need about 4.20 RMB to buy an equivalent basket of goods in China than what 1 USD buys in the US, not 7 RMB. This measure is the "purchasing power parity" exchange rate, and is usually below the nominal exchange rate for imperialised countries and above it for the imperialist countries. The OECD has a table of the PPP exchange rate for several countries here: https://data.oecd.org/conversion/purchasing-power-parities-ppp.htm
It's an essential part of the unequal trade relations that keep globalisation going. In practice, when you travel to China, you'll notice that you can buy twice as much stuff there than what you could back home. And conversely, a Chinese person travelling to the US will find everything twice as expensive. These relations can change quite rapidly, for instance in Argentina we had a PPP exchange rate almost on par with the nominal in 2015, despite persistently high inflation, when the government managed to turn the country into one of the least indebted in the world, but immediately afterwards a rightist government took the biggest IMF loan in the history of the institution, defaulted on it, crashed everything and now the PPP is three times below the nominal exchange rate, and again an American can come over here and buy everything, like in that scene from Eurotrip.