NCERT Class 12 Macroeconomics: Chapter 6 - Open Economy Macroeconomics | CBSE | English - FER Part 2

Exam preparation @ https://www.doorsteptutor.com/Exams/ Masters or Postgraduate Level Science, Social Studies and Humanities @    / testprep   Hindi lectures by Examrace @    / examracehindi   Videos from nursery to Class 5 @    / funprof   NEET, JEE, BITSAT, KVPY, Class 11-12 Science (Physics, Chemistry, Biology and Mathematics) @    / doorsteptutor   Also visit Lectures, Notes, Questions @ https://www.doorsteptutor.com/ ICSE, NCERT, NIOS @ https://www.flexiprep.com/ IGCSE, A & AS Level @ https://www.examtestprep.com/ The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system. According to the theory, as long as there are no barriers to trade like tariffs (taxes on trade) and quotas (quantitative limits on imports), exchange rates should eventually adjust so that the same product costs the same whether measured in rupees in India, or dollars in the US, yen in Japan and so on, except for differences in transportation. Over the long run, therefore, exchange rates between any two national currencies adjust to reflect differences in the price levels in the two countries If a shirt costs $8 in the US and Rs 400 in India, the rupee-dollar exchange rate should be Rs 50. To see why, at any rate higher than Rs 50, say Rs 60, it costs Rs 480 per shirt in the US but only Rs 400 in India. In that case, all foreign customers would buy shirts from India. Similarly, any exchange rate below Rs 50 per dollar will send all the shirt business to the US. Next, we suppose that prices in India rise by 20 per cent while prices in the US rise by 50 per cent. Indian shirts would now cost Rs 480 per shirt while American shirts cost $12 per shirt. For these two prices to be equivalent, $12 must be worth Rs 480, or one dollar must be worth Rs 40. The dollar, therefore, has depreciated. #examrace #upsc #ugcnet