"A theory of international exchange which holds that the price of similar goods in different countries is the same" is the concept of :
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Purchasing power parity
The theory that the price of similar goods in different countries is the same is called purchasing power parity (PPP). The prices are compared after turning them into one currency.
Suppose a basket of goods costs ₹ 1,000 in India and 20 dollars in the USA. The two sums buy the same goods, so by this theory one dollar should be worth ₹ 50.
Option (1) Real exchange rate — Incorrect. The real exchange rate is the relative price of foreign goods in terms of domestic goods. It shows how cheap or dear foreign goods are for us. It is a measure, not a theory.
Option (2) Present value — Incorrect. Present value is the sum of money today that would grow to a given amount in the future. It grows at the market rate of interest. It is used to price bonds and has nothing to do with exchange between countries.
Option (3) Purchasing power parity — Correct. The exchange rate settles where each currency buys the same basket of goods.
Option (4) Nominal exchange rate — Incorrect. The nominal exchange rate is the price of one currency in terms of another, such as rupees per dollar. It does not compare the prices of goods.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 13-05 S1* | – | – | 17-06 S3 | – |
* A similar question.
NCERT (2026-27): “…The demand for imports depends on domestic income (Y) and the real exchange rate (R ). Higher income leads to higher imports. Recall that the real exchange rate is defined as the relative price of foreign goods in terms of domestic goods.…” NCERT (2026-27), Introductory Macroeconomics, Glossary: “…Nominal exchange rate The number of units of domestic currency one must give up to get an unit of foreign currency; the price of foreign currency in terms of domestic currency.… …Present value (of a bond) That amount of money which, if kept today in an interest earning project, would generate the same income as the sum promised by a bond over its lifetime.… …Purchasing power parity A theory of international exchange which holds that the price of similar goods in different countries is the same.…” |