Question

Indian GDP in 2010 was 78.9 trillion rupees, whileU.S. GDP was $14.5 trillion. The exchange rate in 2010 was 45.7 rupees per dollar. India turns out to have lower prices than the United States (this is true more generally for poorcountries): the price level in India (converted to dollars) divided by the price level in the United States was 0.368 in 2010.

(a) What is the ratio of Indian GDP to U.S. GDP if we dont take into account the differencesin relative prices and simply use the exchange rate to make the conversion?
(b) What is the ratio of real GDP in India to real GDP in the United States in commonprices?
(c) Why are these two numbers different?

Answer 1

Step-by-step explanation:

a )

Ratio of GDP on the basis of exchange rate :

GDP of india / GDP of united states

= 78.9 x 10¹⁸ x 1 / 14.5 x 10¹⁸ x 45.7

= 0.12

b )

Ratio of GDP on the basis of commonprices :

GDP of india / GDP of united states

= (78.9 x 10¹⁸ / 14.5 x 10¹⁸ ) x ratio of price level

= (78.9 / 14.5) x .368

= 2

c ) These two numbers are different because the exchange rate of currency

is controlled by price level in two countries but exchange rate is also influenced by many other factors including price level . So ratio of price level and exchange rate are different. Exchange rate is also influenced by speculative demand , foreign exchange reserve etc.