Consider the following statements about the purchasing power parity 1 ...........

Economic Affairs Balance of Payments

Download Solution PDF

Consider the following statements about the purchasing power parity

1. If the real exchange rate is equal to zero, currencies are at purchasing power parity.

2. If the real exchange rises above one, this means that goods abroad have become more expensive than goods at home.

3. The real exchange rate is taken as a measure of a country’s international competitiveness.

Which of the statements given above is/are correct?

1 and 3 only

2 and 3 only

1, 2 and 3

2 only

छोटे Courses बड़े Results

Master Balance of Payments

Prepare through Micro-courses

Try Now

Explanation:

If the real exchange rate is equal to one, currencies are at purchasing power parity. This means that goods cost the same in two countries when measured in the same currency. For instance, if a pen costs $4 in the US and the nominal exchange rate is Rs 50 per US dollar, then with a real exchange rate of 1, it should cost Rs 200 (ePf = 50 × 4) in India. If the real exchange rises above one, this means that goods abroad have become more expensive than goods at home. The real exchange rate is often taken as a measure of a country’s international competitiveness