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If a country's currency isdetermined by the strength of its

economy, why isn't the U.S. dollarworth more than the Britishpound?

A:Generally speaking, when Country A's currency is worth more than that ofCountry B, it does not necessarily mean that Country A'seconomy 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 currenciesover time.Supply

anddemand,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'spurchasing power can also be used as anindicator of the relative

worth of currencies. For example, if US$1 can be exchanged for XYZ$1, it would

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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, seeCommodity Prices And Currency

Movements,Wading Into The Currency Market andCommon 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 1 and CPI value hovers above or belo! 1 to reflect !hether the average price has

increased or decreased over the period.

"nce !e have CPI values for t!o periods# !e can determine the inflation rate over the periods.

$ormula

%stimating CPI involves surveying people to identify !hat 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 follo!ing formula is used to calculate CPI&

Consumer Price Inde !Current Period Price of the Bas"et

# $%%Base Period Price of the Bas"et

In practice many ad'ustments 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 # the *ureau of +abor tatistics estimates CPI on regular basis. I,$ and -orld *ank provide CPI

and other data for ma'ority of countries.

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%xample

In 1/# !hen her hah sei0ed control of India from umayun# her average residents spent /2 of

their total annual consumption budget on food# 32 on fuel# 32 on clothes and 32 on education.

In 1/# the 4ing sat do!n !ith his vi0ier to find out !hether the standard of life has improved or!orsened over the period. They pulled out some data&

Price in &upees

 ear $()( ear $()%

*ood (+ (%

*uel + +(

Clothes $ $(

-ducation % $%%

"ver the five years# there !as little change in the residents5 spending preferences. elp the king

determine !hether people are feeling richer or poorer.

In order to calculate CPI# 1/ and 1/ prices are !eighted according to consumers5 spending

preferences.

/eight Price in &upees

 ear $()( ear $()%

*ood )%0 (+ (%

*uel +%0 + +(

Clothes +%0 $ $(

-ducation +%0 % $%%

-eighted 6verage Prices in 1/ 7 ./ 8 3 9 .3 8 3: 9 .3 8 1: 9 .3 8 ; 7 /:.<

-eighted 6verage Prices in 1/ 7 ./ 8 9 .3 8 3 9 .3 8 1 9 .3 8 1 7 /=

"nce !e have total price of the basket for both periods# !e can 'ust plug in the figures in the follo!ing

formula&

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Consumer Price Inde

!

Current Period Price of the

Bas"et # $%%

!

).1

% # $%% !

.$Base Period Price of the Bas"et )2

CPI in 1/ is ;;.1: as compared to 1 in 1/. This tells that there is no deterioration in the

purchasing po!er of the people.

 33 4S 5C

 33 means telegraphic transfer, or simply wire transfer. It's the simplest and easiest

payment method to use.

 363 payment in ad7ance is usually used when the sample and small 8uantity

shipments are transported by air. 3he reason why is that the documents li"e air

waybill, commercial in7oice and pac"ing list will be sent to you along with the

shipment by the same plane. 9s soon as the shipment arri7es, you can clear the

customs and pic" up the goods with the documents. 9s it's ac"nowledged, 363

payment in ad7ance presents ris" to the importer if the supplier is not an honest

one.

5etter of credit

9n irre7ocable 5etter of Credit is also an often used payment method. It is oftenreferred to an 56C. 5etters of Credit are formal payment methods that o:er a lot of

protection to the parties.

Simply put, a letter of credit is a letter written by the importer's ban" to the

eporter. It 7eri;es that the payment will be guaranteed when the ban" is presented

with the concrete documents <bill of lading, and freight documents=. >ost letters of

credit are irre7ocable once the importer has had them sent.

9 letter of credit usually includes applicant <you, the importer=, bene;ciary <our I6-

agent=, opening ban", negotiating ban", speci;cation and 8uantity of the goods,

amount of money, loading port and destination port, shipment date, the 7alidity

date of the 56C, terms and conditions agreed by both the importer and seller, and

the documents re8uired by the importers <bill of lading, commercial in7oice, pac"ing

list, insurance certi;cate, etc.=

 3he 56C payment procedure is usually as follows@

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a. ou <the importer= applies to open the 56C to us <the seller= through a ban" who

can open the 56C in your country.

b. 3he opening ban" will inform 3he Ban" of China that the 56C has been opened.

c. 3he Ban" of China will inform us that the 56C has been established.

d. /e'll chec" all the terms and conditions listed in the 56C. If all terms and

conditions are acceptable, we'll arrange the shipment within the time speci;ed inthe 56C.

e. 9fter the goods are loaded onto the ship without any damage, the captain will

issue the clean bill of lading to us.

f. /e will submit the clean bill of lading and other rele7ant documents to 3he Ban"

of China to gather the payment. Anly with clean bill of lading can you claim the

ownership of the goods.

g. 3he Ban" of China will send the clean bill of lading and rele7ant documents to

your ban" <the opening ban"=.

h. 3he opening ban" will inform you that all documents are recei7ed.

i. ou will go to the ban" to ma"e the payment to get the clean bill of lading and

rele7an documents.

 . /ith all of these documents, you can clear the import Customs and pic" up the

goods after the goods arri7e on the destination sea port.

56C is used for the larger 8uantity order shipped by sea.

 3he typical 56C scenario ta"es $)+$ days to complete.

 3here is no payment method that is perfectly safe to both the importer and supplier

at the same time.

Source:

5ogistics Coordinator

Asker's rating & comment

-cellent. 4ery detailed information. Came 7ery 7ery handy. 3han"s

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Amahaw" answered years ago

56C is a letter of credit. Eormally you would need to wor" with a Ban" in to ma"e

sure that you are going to get your product while the manufacuture would ma"e

sure they are going to get their payment. 3he ban" would then hold your money <for

a fee= until a consolidator or or cargo company con;rms that you ha7e recei7ed

your product, then they manufacturer will ta"e the signed 56C to the ban" to recei7e

their funds. 9 /63 is a wire transfer. 3he fee's are lower and you are able to use a

domestic Ban".

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5loyd answered $% months ago

So, if I'm the importer and if someone in China says terms 363, what net? Fo I as"

for their ban" details so I can send money? 9nd then I go to my ban" and do a

B9Cs? Ar does my ban" <maor highstreet with business a6c= "now what a 363 is and

if so what information will they need?