These are really good questions. Unfortunately, they are also somewhat complicated to answer. :)

So, let's start with the observation that the real value of money is the stuff you can buy with it. So if your wage doubles, but all the prices you pay quadruple, then your real income has fallen by one-half. Keep this fact in mind; almost everything interesting about exchange rates derives from it.

Now, what changes when exchange rates move is how expensive foreign-produced goods and services are relative to internally-made goods and services. If the value of the dollar falls against a currency, then we can afford fewer foreign goods from that country (like French wines). However, the price of goods denominated in the local currency (like Californian wines) doesn't change. So a fall in the dollar means that French wine gets more expensive, and Californian wine stays the same price. This is why a 16% drop in the dollar relative to the euro doesn't mean that your wages have dropped 16%; not everything you buy comes from Europe, and to the extent it does you can often substitute relatively cheap American goods for relatively expensive European ones. Your real wage has dropped, mind, just not nearly in direct proportion. As a WAG, I'd guess it's on the order of a couple of tenths of percent drop in real income.

But the exchange rate between the euro and the dollar doesn't really say anything about how expensive Indian programmers are. For an American company considering outsourcing to (say) Infosys, the important exchange rate is the exchange rate between the rupee and the dollar -- the euro doesn't come into the decision at all. The US dollar has fallen only 5% against the rupee in the past year, so we haven't gotten that much cheaper, sadly.

As Harold Wilson said, as was widely mocked for, "It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued." The BBC has a report on that and what it meant here. http://news.bbc.co.uk/onthisday/hi/dates/stories/november/19/newsid_3208000/3208396.stm
I suppose to end I just say that if we have four more years of Bush all of our programming jobs are going to India and we're going to end up as personal servants wiping the asses of the aging super rich (or rioting in the streets). Happy New Year :)

When a currency goes down, it means exports are cheaper and imports are more expensive. So would it be a good idea for poor states like Missouri to use a different currency from the rest of the United States, so that their currency could "find its own level" as it were? Or maybe we should use a different currency for the expensive cities versus the cheaper rural areas. That way we could adjust for local cost of living differences in interesting ways. After all, aren't the international currency markets really just based on regional cost of living differences?

Just thinking out loud here...

Yeah, you are exactly right about the benefits of having varying exchange rates between regions. However, there are costs to a region having its own currency, too.

First, there's the cost of having to worry about currency hedging -- if a business wants to sign a long-term contract with someone outside the currency area, they need to buy insurance to protect against large, unexpected exchange-rate movements. Second, and more subtly, having multiple currencies makes it harder to compare prices between the currency regions. This decreases price competition and makes goods more expensive. Eliminating these two things was the major economic justification for the euro.

Economists have an idea called the "optimal currency area". The basic idea is that the costs of a single currency are minimized when wages and prices are flexible, and workers and businesses can move in and out of different regions freely, because individuals and businesses will naturally move to the places where they can get the best standard of living, and this will "even out" differences over time. Anything that makes it harder for workers and businesses to move (such as language barriers between the regions) makes the case for a single currency more questionable.

This is why there was a lot of debate about whether the Euro was a good idea. Eliminating the exchange rate costs was a big win, as was the ability to easily compare prices. But because Europe has lots of languages, European labor mobility is limited -- German workers can't easily move into France when France is booming and Germany depressed, because they won't have the right language. Contrast this with the US: American workers would find a move from South Carolina to Massachusetts much less difficult.