Question

Q7. WHAT IS THE EXCHANGE RATE OF THE CANADIAN DOLLAR WITH YOUR CURRENCY? WHY IS IT GOING UP OR DOWN? WHAT IS THE EXCHANGE RATE? WHAT IS CURRENCY APPRECIATION? WHAT IS CURRENCY DEPRECIATION? WHAT IS PURCHASING POWER PARITY (PPP) AND WHY IS IT IMPORTANT FOR CALCULATING GDP?

Answer 1

My country's currency is INR. So, as of now 1 Canadian Dollar = 56.06 INR

Exchange rates are fluctuating randomly because they mainly depend on the demand and supply of currencies. We know that the demand of a particular currency can increase/decrease based on a myriad of market factors. So, a high flow of currency indicates a greater demand for the same and therefore valued higher and vice versa holds true as well.

Exchange rate is the rate at which one currency will be exchanged for another in a forex market. We can interpret exchange rate as the value of one country's currency in relation to another currency. In the first part, exchange rate of Canadian dollar is 56.06 INR meaning that 1 Canadian dollar is equivalent to 56.06 INR.

If a currency's value increases in relation to another currency we say that the currency appreciates. For instance, if 1 Canadian Dollar is equivalent to 60 INR, we can say that the Canadian Dollar has appreciated.

On the other hand, if the value of the currency decreases in relation to another we say that the currency has depreciated. For instance, If 1 Canadian dollar equivalent falls to 30 INR, we say that the currency has depreciated.

PPP as the name suggests is used to perceive the purchasing power of a country through 'basket of goods' approach. Due to varying exchange rates across countries, the GDP value doesn't really tell us the entire story with respect to a country's economic growth. In the PPP approach (real gdp), the basket of goods are standardized against the US Dollar and calculated accordingly. That's the reason you will find Real GDP>Nominal GDP for most countries except for US. Since it is standardized real gdp=nominal gdp. This inclusion of purchasing power provides us with more relevant interpretation.

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