Is it appropriate to use exchange rates as conversion factors when measuring and comparing income levels per capita?
If there were free trade, stable exchange rates, small transportation costs, and no market imperfections, the use of exchange rates to convert income measures from a national to a common currency would result in comparable estimates across countries. However, market imperfections exist, and it is generally agreed that conversion using exchange rates might be misleading. In theory, changes in exchange rates are caused by changes in relative price-levels between countries. In practice, however, exchange rates are also affected by capital flows, speculation and market intervention by governments or central banks. Thus, what one US$ buys in US does not necessarily correspond with the amount of goods and services that one US$ converted into another currency (using the exchange rate) buys in another country. Example; A haircut costs 30 US$ in the US. The same haircut (the same service) costs 400 NOK in Norway. The exchange rate is 7,5 NOK per US$. Thus, the price of the haircut in Norway is
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