Question

Why do economists believe that exchange rates should move towards the PPP index equalizing the prices of an identical basket of goods and services between countries (adjusted for preferences and taking transactions costs into account)?

In what circumstances do you want the official rates to be, and what it will be used for the country?

Answer 1

Because it would make the cost of producing a same good equal in all countries. This will led to identification of real comparative advantage and trade will be based on real cost effectiveness of countries in producing goods.

We want official rates to provide sufficient freedom to countries to use them to correct Bop disequilibrium and reduce conspicuous consumption of luxurious commodities of foriegn countries. Country can rather direct these resources to more productive uses