suppose the exchange rate between the Rupee and the dollar was Rs. 30 =1$in the year 2010. Suppose the price have doubled in India over 20 years while they have remained fixed in USA. What according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030
Dear Student,
The rupee-dollar exchange rate is given as Rs.30 in the year 2010. This implies that the price of a good (say, pen) is $I in the USA and Rs. 30 in India. It is mentioned that prices have doubled in India over 20 years while they have remained fixed in the USA, so the cost of the pen will be Rs. 60 in 2030 and the cost of the pen remains the same i.e. $1 in the USA since the prices are not changing. For these two prices to be equivalent, Rs.60 must be worth $1. Hence, the rupee will depreciate.
Regards
The rupee-dollar exchange rate is given as Rs.30 in the year 2010. This implies that the price of a good (say, pen) is $I in the USA and Rs. 30 in India. It is mentioned that prices have doubled in India over 20 years while they have remained fixed in the USA, so the cost of the pen will be Rs. 60 in 2030 and the cost of the pen remains the same i.e. $1 in the USA since the prices are not changing. For these two prices to be equivalent, Rs.60 must be worth $1. Hence, the rupee will depreciate.
Regards