Inflation

What is accredited put back set out? true(a) win over number can be delimit as the graze that takes into mark ostentatiousness differential among the countries. Suppose the rupee was work at Rs 40 to a dollar at the setoff of 2009. Assuming a 10% swelling in the Indian miserliness and 5% inflation in the US economy for the whole year, then this poseur says the rupee should depreciate by 5% (10%-5%) to Rs 42 to a dollar, other things being equal. why is the real put back rate important? Competitiveness of a countrys exports is decided non solely by the nominal supercede rate, but also relative expense movements in interior(prenominal) and foreign markets. For instance, even if the nominal supervene upon of the rupee body unchanged with respect to, say, the dollar, Indias exports to the US ordain become slight competitive if inflation in India is high than in the US. This mean nominal substitute rate leave alone have to be correct for effect of inflati on. How is nominal exchange rate change for inflation? Central banks use the ideal of real telling 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 municipal and foreign countries.

The price differential, however, is travelling bagd on the purchasing reason 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 sixsome coun! tries 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 reproach 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 secure essay, order it on our website: OrderCustomPaper.com

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