International-Business-Dr-R-Chandran-E-book

prices in to account. It takes the price
of goods as being determined by the
production condition alone
It takes no note of production factor
in the two countries
236
International Business- Dr. R. Chandran
relative factor prices, which
influence the relative prices of goods.
It assumes a linear homogeneous
production function of one degree
PURCHASING POWE PARITY AND IPACT ON TRADE
The estimates of per capita income in various countries are not strictly
comparable because they are based on conversion of per capita income of a
country as measured in its local standard money unit (the rupee in India) to a
common currency denominator (US $ in this case), the conversion being
based on the official exchange rates. The official exchange rates do not
reflect the purchasing power of different countries in their respective
counties. Thus, India may have had a low per capita income e.g., US $ 420
in 2002 can buy in the USA due to relatively lower prices in India. Hence,
the comparison of national and per capita incomes do not reflect the true
value or purchasing power or command over goods and services in their
respective countries.
A change in exchange rate will also change the per capita income of a
country as expressed in foreign currency. For example, when India devalued
its currency against the US dollar, even when there was no change in the
economy. This is illustrated by the following example:
In India in 1990: INR 21 = US
$ 1
After devaluation in march-April 1992: INR 29 = US
$ 1
After 10 years, in 2002: INR 46 = US
$ 1
After 5 years in 2007: INR 40 = US $
1
The practice of devaluation and depreciation of local currency against the
US $ was very common in all developing countries and less developed
nations, over the past two decades. Surprisingly, for the first time, Indian
rupee is appreciating against dollar in 2007.
The competitive advantage of Nations
Only for Private Circulation