According to OECD the price level of India is 29, and that of united states is 113, and nominal exchange rate is 64-1(INR-$). So what is the real exchange rate?

  1. Is it $$RER = NER\times\frac{US_{PriceLevel}}{INR_{PriceLevel}}=273 \\ or \\RER = NER\times\frac{INR_{PriceLevel}}{US_{PriceLevel}}=16$$

I believe it should be the second one, because the price level in India is less than that in US so buying power of dollar should be less. Is this reasoning correct?

  • 1
    $\begingroup$ This a trivial question you could easily solve by not omitting the units of measurement. $\endgroup$ – Giskard Feb 9 '18 at 7:18
  • $\begingroup$ That's exactly what I thought. I think price level should have units $(\$)^{-1}$ and $(inr)^-1$ and nominal exchange rate should be $(inr)/\$ $. Are these units correct? $\endgroup$ – Piyush Divyanakar Feb 9 '18 at 7:23
  • $\begingroup$ Why do you think these are correct? Why do you think they are incorrect? The kind of questions you are posting to the site are not a good match for a Stack Exchange. These should be broad questions about concepts and theory, not "I did this, is it ok?" $\endgroup$ – Giskard Feb 9 '18 at 7:42
  • $\begingroup$ I am extremely new to this. I don't have enough understanding of the subject to write questions in a way that is broad and general. I am not really asking this for a homework or an assignment but to improve my understanding. I will ask better questions in the future but I have to get stupid ones out the way first right. PS: Just second week since I started macroeconomics. $\endgroup$ – Piyush Divyanakar Feb 9 '18 at 8:58
  • $\begingroup$ I sympathize but that is not what this SE is for. $\endgroup$ – Giskard Feb 9 '18 at 9:39

Presumably one bundle of goods and services which costs about USD 113 in the United States would cost about USD 29 in India

so the bundle which costs about USD 113 in the United States would cost about INR 18546 in India at a market exchange rate of 64:1

suggesting a purchasing power parity of about INR 16.4 : USD 1

The OECD calculations of PPPs suggest about 17:1 recently for India so this is the correct order of magnitude

| improve this answer | |

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.