Question

a. Write down the equation for Absolute Purchasing

Power Parity

b. Consider the information given in the following Table,

and fill in cells (i) – (ix).

c. Are the official exchange rates in India undervalued

or overvalued?

d. Evaluate if real exchange rate has appreciated or

depreciated in 2012 and 2015, estimate the rate of

such appreciation or depreciation, and indicate them

in cells (x)-(xiii).

e. What are the nominal exchange rates that would

maintain Absolute PPP. Indicate them in cells (xiv) -

(xvi).

	2010		2012		2015
Country	India	USA	India	USA	India	USA
Nominal Ex Rate	i    $/Rs.	46  Rs/$	ii  $/Rs.	53 Rs/$	iii $/Rs.	64  Rs/$
Price Index – Local Currency	4600	100	5474	105	6762	108
Real Exchange Rate	iv US Goods/Indian Good	v. Indian Goods/US Good	vi US Goods/Indian Good	vii Indian Goods/US Good	viii US Goods/Indian Good	ix Indian Goods/US Good
Rate of App/Dep of Real Ex Rate			x	xi	xii	xiii
Nominal Exchange Rate as per PPP		xiv		xv		xvi

Answer 1

The table is completed as below

	2010		2012		2015
Country	India	USA	India	USA	India	USA
Nominal Exchange rate	0.021739	46	0.0188679	53	0.015625	64
Price Index	4600	100	5474	105	6762	108
Real Exchange rate	0.000473	2116	0.0003619	2763.0667	0.00024956	4007.111
Rate of App/Dep of Real Ex Rate			-23.41842	30.57971	-31.045918	45.02405
Nominal Exchange rate as per PPP		46		52.133333		62.61111