Inflation

What is sincere put back set out? square win over number can be define as the number that takes into mark rising prices differential amongst the countries. Suppose the rupee was work at Rs 40 to a dollar at the setoff of 2009. Assuming a 10% pomposity in the Indian miserliness and 5% inflation in the US economy for the whole year, then this instance says the rupee should depreciate by 5% (10%-5%) to Rs 42 to a dollar, other things being equal. why is the real transfigure rate important? Competitiveness of a countrys exports is decided non hardly by the nominal convince rate, but also congeneric expense movements in interior(prenominal) and foreign markets. For instance, even if the nominal transposition of the rupee body unchanged with respect to, say, the dollar, Indias exports to the US provide become slight competitive if inflation in India is higher(prenominal) than in the US. This mean nominal transfer rate leave alone have to be correct for eff ect of inflation. How is nominal exchange rate change for inflation? Central banks use the impression of real utile 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 interior(prenominal) and foreign countries.

The price differential, however, is travelling bagd on the purchasing business office 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 half-dozen countries 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 mar 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 abounding essay, order it on our website: OrderCustomPaper.com

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