Understanding Wages and Exchange Rates Across Countries

An image of a ‘money tree’ laden with high denomination bills.

Introduction to the Misconception

People often talk about wages and exchange rates as if they can be compared directly across countries. China is said to “underpay” its workers. The United States is said to “overpay.”

But these comparisons miss the point. What really matters is how much things cost where you live—and what kind of life your wages can buy.

Cost of Living and Wages

In the United States, wages are high, but so is the cost of nearly every service. Health care in particular is famously expensive. Even basic procedures can cost thousands of dollars. This isn’t accidental. It reflects a system shaped by political choices, where health care is treated as a business, and voters have repeatedly rejected major changes.

In contrast, countries like China or Jamaica, or St. Kitts have lower average wages, but also much lower costs.

Comparing Economies

Doctors in St. Kitts, for example, earn less than half the salaries of their US counterparts. Yet they can still live comfortably because rent, groceries, transportation, housing, and services are affordable. Health care in these countries is not cheaper because it’s lower quality—it’s cheaper because the economy is scaled to local income levels.

If an American doctor tried to move to St. Kitts and charge US rates, they would likely have no patients. That’s not because people in St. Kitts don’t value medical care—it’s because very few could afford it.

Wages and Service Fees

The same is true for plumbers, teachers, or lawyers. Wages and service fees only work within the context of the country’s entire economic system.

So when people say China is “undervaluing” its currency to sell goods more cheaply, it’s not just about exports. Chinese workers can afford to live on lower wages because goods and services inside China are priced accordingly. Meanwhile, in the US, workers need higher wages just to survive the high costs of housing, insurance, education, and food.

Understanding Economies as Ecosystems

Each economy is its own ecosystem. The US dollar is strong globally because of investor confidence, but inside the US, that strength translates into high prices. In lower-wage economies, money goes further at home, even if it looks weaker abroad. Exchange rates, in this sense, tell only part of the story.

This is why direct comparisons between countries often mislead. You can’t understand wages or currency values unless you also look at cost of living, local pricing, and the structure of public services. The real value of money isn’t what it converts to—it’s what it can actually buy.

A More Relevant Question

The question we should be asking isn’t “How much does a worker earn?” but “What kind of life can that wage support where they live?” That answer varies widely, and it’s the only comparison that truly matters.

Conclusion

In conclusion, comparing wages and exchange rates across countries without considering the local cost of living and economic context can be misleading. The value of money is not just in its exchange rate but in what it can buy locally. Understanding this is crucial for making accurate comparisons and appreciating the unique characteristics of each country’s economy.

Frequently Asked Questions

Q: Why are wages in some countries considered high or low?

A: Wages are considered high or low relative to the cost of living in each country. A high wage in one country may not provide the same standard of living as a lower wage in another country with a lower cost of living.

Q: How do exchange rates affect the cost of living?

A: Exchange rates can affect the cost of imports and exports but do not directly determine the cost of living within a country. The cost of living is influenced by local prices, which are set based on the country’s economic conditions and policies.

Q: What is the most important factor in determining the value of money?

A: The most important factor is not the exchange rate but what the money can buy locally. The purchasing power of money within a country is what truly determines its value.

Source: AI