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If

a
country's
currency
is
determined by the strength of its
economy, why isn't the U.S. dollar
worth more than the British
pound?

A:
Generally speaking, when Country A's currency is worth more than that of
Country B, it does not necessarily mean that Country A's economy is stronger
than B's. For example, Japan's economy is regarded as one of the world's
strongest, and yet a single Japanese yen exchanges for considerably less than
US$1. On the other hand, Cyprus' economy is considerably smaller than the U.S.
economy, but Cyprus' currency, which is the pound, exchanges for about twice as
much as the U.S. dollar.
The fact of the matter is that looking at a currency's worth relative to that of
another currency at a static point in time is meaningless; the best way to judge a
currency's worth is to watch it in relation to other currencies over time. Supply
and demand, inflation and other economic factors will cause changes to a
currency's relative worth, and it is this change in value that can be used to
evaluate worth.
For example, let's say that at the beginning of the year, the U.S. dollar was worth
1.75 XYZ dollars (a fictitious currency), and six months later, the U.S. dollar is
worth 2.00 XYZ dollars. In this case, the U.S. dollar increased in value over the
XYZ dollar by around 14%. This change could be due to XYZ having higher
inflation, or to just an overall lower demand for the XYZ dollar.
A currency's purchasing power can also be used as an indicator of the relative
worth of currencies. For example, if US$1 can be exchanged for XYZ$1, it would

appear that the XYZ dollar is worth as much as the U.S. dollar. However, if the
purchasing power of XYZ$1 is equal to only US$0.50, then you can conclude that
the U.S. dollar is worth more than the XYZ dollar, because a single U.S. dollar
can be used to buy more goods than a single XYZ dollar can.
To learn more about currency trading, see Commodity Prices And Currency
Movements, Wading Into The Currency Market and Common Questions About
Currency Trading.

Consumer Price Index (CPI)


Consumer price index (CPI) is a statistic used to measure average price of a basket of commonly used
goods and services in a period relative to some base period. The base period price of the basket is
marked to 100 and CPI value hovers above or below 100 to reflect whether the average price has
increased or decreased over the period.
Once we have CPI values for two periods, we can determine the inflation rate over the periods.

Formula
Estimating CPI involves surveying people to identify what they purchase on regular basis. This helps
determine the basket of commonly used goods and services. Total price of the basket is obtained from
market for current period and base period and following formula is used to calculate CPI:

Consumer Price Index =

Current Period Price of the Basket

100

Base Period Price of the Basket

In practice many adjustments are made to CPI on account of seasonality, changes in composition of
the basket, etc. and different versions of CPI are calculated to cater to real life needs.
In US, the Bureau of Labor Statistics estimates CPI on regular basis. IMF and World Bank provide CPI
and other data for majority of countries.

Example
In 1540, when Sher Shah seized control of India from Humayun, her average residents spent 40% of
their total annual consumption budget on food, 20% on fuel, 20% on clothes and 20% on education.
In 1545, the King sat down with his vizier to find out whether the standard of life has improved or
worsened over the period. They pulled out some data:

Price in Rupees
Year 1545

Year 1540

Food

52

50

Fuel

27

25

Clothes

17

15

Education

90

100

Over the five years, there was little change in the residents' spending preferences. Help the king
determine whether people are feeling richer or poorer.
In order to calculate CPI, 1545 and 1540 prices are weighted according to consumers' spending
preferences.

Weight

Price in Rupees
Year 1545

Year 1540

Food

40%

52

50

Fuel

20%

27

25

Clothes

20%

17

15

Education

20%

90

100

Weighted Average Prices in 1545 = 0.4 52 + 0.2 27 + 0.2 17 + 0.2 90 = 47.60


Weighted Average Prices in 1540 = 0.4 50 + 0.2 25 + 0.2 15 + 0.2 100 = 48
Once we have total price of the basket for both periods, we can just plug in the figures in the following
formula:

Consumer Price Index


=

Current Period Price of the


Basket
Base Period Price of the Basket

100
=

47.6
100 =
0
99.17
48

CPI in 1545 is 99.17 as compared to 100 in 1540. This tells that there is no deterioration in the
purchasing power of the people.

TT VS LC
TT means telegraphic transfer, or simply wire transfer. It's the simplest and easiest
payment method to use.
T/T payment in advance is usually used when the sample and small quantity
shipments are transported by air. The reason why is that the documents like air
waybill, commercial invoice and packing list will be sent to you along with the
shipment by the same plane. As soon as the shipment arrives, you can clear the
customs and pick up the goods with the documents. As it's acknowledged, T/T
payment in advance presents risk to the importer if the supplier is not an honest
one.

Letter of credit
An irrevocable Letter of Credit is also an often used payment method. It is often
referred to an L/C. Letters of Credit are formal payment methods that offer a lot of
protection to the parties.
Simply put, a letter of credit is a letter written by the importer's bank to the
exporter. It verifies that the payment will be guaranteed when the bank is presented
with the concrete documents (bill of lading, and freight documents). Most letters of
credit are "irrevocable" once the importer has had them sent.
A letter of credit usually includes applicant (you, the importer), beneficiary (our I/E
agent), opening bank, negotiating bank, specification and quantity of the goods,
amount of money, loading port and destination port, shipment date, the validity
date of the L/C, terms and conditions agreed by both the importer and seller, and
the documents required by the importers (bill of lading, commercial invoice, packing
list, insurance certificate, etc.)
The L/C payment procedure is usually as follows:

a. You (the importer) applies to open the L/C to us (the seller) through a bank who
can open the L/C in your country.
b. The opening bank will inform The Bank of China that the L/C has been opened.
c. The Bank of China will inform us that the L/C has been established.
d. We'll check all the terms and conditions listed in the L/C. If all terms and
conditions are acceptable, we'll arrange the shipment within the time specified in
the L/C.
e. After the goods are loaded onto the ship without any damage, the captain will
issue the clean bill of lading to us.
f. We will submit the clean bill of lading and other relevant documents to The Bank
of China to gather the payment. Only with clean bill of lading can you claim the
ownership of the goods.
g. The Bank of China will send the clean bill of lading and relevant documents to
your bank (the opening bank).
h. The opening bank will inform you that all documents are received.
i. You will go to the bank to make the payment to get the clean bill of lading and
relevan documents.
j. With all of these documents, you can clear the import Customs and pick up the
goods after the goods arrive on the destination sea port.
L/C is used for the larger quantity order shipped by sea.
The typical L/C scenario takes 14-21 days to complete.
There is no payment method that is perfectly safe to both the importer and supplier
at the same time.
Source:

Logistics Coordinator
Asker's rating & comment

Excellent. Very detailed information. Came very very handy. Thanks


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Other Answers (8)
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Omahawk answered 7 years ago


L/C is a letter of credit. Normally you would need to work with a Bank in to make
sure that you are going to get your product while the manufacuture would make
sure they are going to get their payment. The bank would then hold your money (for
a fee) until a consolidator or or cargo company confirms that you have received
your product, then they manufacturer will take the signed L/C to the bank to receive
their funds. A W/T is a wire transfer. The fee's are lower and you are able to use a
domestic Bank.
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Comment

Lloyd answered 10 months ago


So, if I'm the importer and if someone in China says terms T/T, what next? Do I ask
for their bank details so I can send money? And then I go to my bank and do a
BACs? Or does my bank (major highstreet with business a/c) know what a T/T is and
if so what information will they need?