A shirt costs $10 in the US and Rs 600 in India. Later, prices in India rise by 10 per cent and prices in the US rise by 20 per cent. Assume the purchasing power parity theory holds.
Match List-I with List-II:
| List-I | List-II | ||
|---|---|---|---|
| (A) | Rupee-dollar exchange rate at first | (I) | Rs 55 per dollar |
| (B) | Price of the shirt in India after the rise | (II) | $12 |
| (C) | Price of the shirt in the US after the rise | (III) | Rs 60 per dollar |
| (D) | Rupee-dollar exchange rate after the rise | (IV) | Rs 660 |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) - (III), (B) - (IV), (C) - (II), (D) - (I)
Under purchasing power parity, the exchange rate makes the same shirt cost the same in both countries. So the rate = price in India ÷ price in the US.
| List-I | List-II | Reason |
|---|---|---|
| (A) Rupee-dollar exchange rate at first | (III) Rs 60 per dollar | 600 ÷ 10 = Rs 60 per dollar. |
| (B) Price of the shirt in India after the rise | (IV) Rs 660 | 600 + 10% of 600 = Rs 660. |
| (C) Price of the shirt in the US after the rise | (II) $12 | 10 + 20% of 10 = $12. |
| (D) Rupee-dollar exchange rate after the rise | (I) Rs 55 per dollar | 660 ÷ 12 = Rs 55 per dollar. |
Prices rose faster in the US, so the dollar now buys fewer rupees: the dollar has depreciated.
NCERT (2026-27): “Exchange Rates in the Long Run … According to the theory, as long as there are no barriers to trade like tariffs (taxes on trade) and quotas (quantitative limits on imports), exchange rates should eventually adjust so that the same product costs the same whether measured in rupees in India, or dollars in the US, yen in Japan and so on, except for differences in transportation. Over the long run, therefore, exchange rates between any two national currencies adjust to reflect differences in the price levels in the two countries.” “EXAMPLE If a shirt costs $8 in the US and Rs 400 in India, the rupee-dollar exchange rate should be Rs 50. To see why, at any rate higher than Rs 50, say Rs 60, it costs Rs 480 per shirt in the US but only Rs 400 in India. In that case, all foreign customers would buy shirts from India. Similarly, any exchange rate below Rs 50 per dollar will send all the shirt business to the US. Next, we suppose that prices in India rise by 20 per cent while prices in the US rise by 50 per cent. Indian shirts would now cost Rs 480 per shirt while American shirts cost $12 per shirt. For these two prices to be equivalent, $12 must be worth Rs 480, or one dollar must be worth Rs 40. The dollar, therefore, has depreciated.” |