Inflation

What is true(a) put back set out? historical win over number can be delimitate as the stray that takes into mark ostentation differential amidst the countries. Suppose the rupee was work at Rs 40 to a dollar at the setoff of 2009. Assuming a 10% ostentatiousness in the Indian miserliness and 5% inflation in the US economy for the whole year, then this mannequin says the rupee should depreciate by 5% (10%-5%) to Rs 42 to a dollar, other things being equal. why is the real change rate important? Competitiveness of a countrys exports is decided non except by the nominal interchange rate, but also telling expense movements in interior(prenominal) and foreign markets. For instance, even if the nominal modify of the rupee body unchanged with respect to, say, the dollar, Indias exports to the US go out become slight competitive if inflation in India is high than in the US. This mean nominal win over rate leave have to be correct for effect of inflation. H ow is nominal exchange rate change for inflation? Central banks use the model of real caterful exchange rate, or REER, to adjust nominal effective exchange rate for inflation. Conceptually, the REER is the weighted average of nominal exchange rate adjusted for the hurt differential between the domestic help and foreign countries.

The price differential, however, is travelling bagd on the purchasing power concept. The currencies used be of those countries with which trade is the highest. How does the rbi calculate REER? The RBI calculates REER for India. It calculates the value of the rupee with respect to two indices, one comprising sextette count! ries and the other 36 countries with a 2004-05 base. The RBI, however, uses the wholesale price index-based inflation whereas globally consumer price indices are used. One conceptual fracture with this model is that it assumes that the base exchange rate is the correct exchange rate or represents the purchasing power parities accurately, which may not be the case. What merely are nominal & real exchange rates? ET...If you want to get a ripe essay, order it on our website: OrderCustomPaper.com

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