• Nominal exchange rate
The nominal exchange rate is the value of one currency that can be exchanged in terms of another currency, that is, how much domestic currency is needed in order to purchase a foreign currency or vice-versa. For example, assume that 1 US Dollar costs Rs 35. The nominal exchange rate can be expressed in the following ways:
1 US Dollar = Rs 35, or
1 Mauritian rupee = 0.029 US Dollar
A decrease in the Mauritian rupee towards the US Dollar is called an appreciation of the Mauritian rupee vis-à-vis the US Dollar. For example, 1 US Dollar = Rs 30. This means that less Mauritian rupees are needed in order to purchase 1 US Dollar. It can therefore result in an increase in imports as imports will become cheaper but it will also …show more content…
Though Cassel was praised as the originator of the PPP theory, some observers did not accept him as being the originator of the PPP theory. Some writers claimed that the theory was developed earlier. Brisman (1933) claims that the PPP theory appeared first in Sweden more than 20 years prior to the Bank Restriction Period. Einzig (1970) traces the origins of the theory to Spanish writers in the sixteenth and seventeenth centuries.
Purchasing power parity (PPP) theory states that the purchasing power of two countries’ currencies is the same when the exchange rates involving the two currencies are in equilibrium. This means that a product or a service should cost the same in the two countries. For example, consider a mobile phone that costs US$1000 in the United States and an exchange rate of 1 U.S. Dollar equal to Rs 35. Therefore the same mobile phone should cost Rs 35000 in Mauritius. If the same mobile phone costs Rs 30000 in Mauritius, consumers will buy the mobile phone in Mauritius whereas if the mobile phone costs Rs 40000 in Mauritius, then consumers will prefer to buy the mobile phone in the United …show more content…
Firstly, it is based on unrealistic assumptions, that is, it assumes that there are no transportation costs and no trade barriers where in the real world, transport costs and trade barriers do exist. Secondly, the PPP theory shows a direct relationship between the exchange rate of two countries’ currencies and their purchasing powers. It therefore ignores other factors of exports and imports like tariffs, capital flows and speculation which would also affect the exchange rate. Thirdly, the theory takes only the merchandise trade into consideration in the balance of payment and lastly, it assumes that price level changes affect exchange rate and that the reverse cannot happen when in fact exchange rate also can affect the price level of a
The nominal exchange rate is the value of one currency that can be exchanged in terms of another currency, that is, how much domestic currency is needed in order to purchase a foreign currency or vice-versa. For example, assume that 1 US Dollar costs Rs 35. The nominal exchange rate can be expressed in the following ways:
1 US Dollar = Rs 35, or
1 Mauritian rupee = 0.029 US Dollar
A decrease in the Mauritian rupee towards the US Dollar is called an appreciation of the Mauritian rupee vis-à-vis the US Dollar. For example, 1 US Dollar = Rs 30. This means that less Mauritian rupees are needed in order to purchase 1 US Dollar. It can therefore result in an increase in imports as imports will become cheaper but it will also …show more content…
Though Cassel was praised as the originator of the PPP theory, some observers did not accept him as being the originator of the PPP theory. Some writers claimed that the theory was developed earlier. Brisman (1933) claims that the PPP theory appeared first in Sweden more than 20 years prior to the Bank Restriction Period. Einzig (1970) traces the origins of the theory to Spanish writers in the sixteenth and seventeenth centuries.
Purchasing power parity (PPP) theory states that the purchasing power of two countries’ currencies is the same when the exchange rates involving the two currencies are in equilibrium. This means that a product or a service should cost the same in the two countries. For example, consider a mobile phone that costs US$1000 in the United States and an exchange rate of 1 U.S. Dollar equal to Rs 35. Therefore the same mobile phone should cost Rs 35000 in Mauritius. If the same mobile phone costs Rs 30000 in Mauritius, consumers will buy the mobile phone in Mauritius whereas if the mobile phone costs Rs 40000 in Mauritius, then consumers will prefer to buy the mobile phone in the United …show more content…
Firstly, it is based on unrealistic assumptions, that is, it assumes that there are no transportation costs and no trade barriers where in the real world, transport costs and trade barriers do exist. Secondly, the PPP theory shows a direct relationship between the exchange rate of two countries’ currencies and their purchasing powers. It therefore ignores other factors of exports and imports like tariffs, capital flows and speculation which would also affect the exchange rate. Thirdly, the theory takes only the merchandise trade into consideration in the balance of payment and lastly, it assumes that price level changes affect exchange rate and that the reverse cannot happen when in fact exchange rate also can affect the price level of a