Why Exchange Rates are not reliable?

Why Exchange Rates are not reliable?

Why Exchange Rates are not reliable? _PC: wiki

1. Market Exchange Rates can change very quickly.

Exchange rates are not stable.

For example, if in India we import huge quantity of Gold then availability of US $ deceases & as per Demand-Supply law it’s value increases wrt INR. That is, INR depreciates against the USD.

They are also affected by the Crude Oil Prices, Political factors, etc.

2. Confidence in US $.

US $ is considered as premium. If anyone has to keep currency his/her first choice is US $. Due to this the demand of US $ increases internationally. It leads to appreciation of US $ against all other currencies. Hence, Exchange rate increases.

The point to be noted here is that market exchange rates get affected by demand & supply of currencies which makes it less-reliable.

To overcome the limitation of calculation of GDP in US $, GDP (PPP) has been suggested as an alternative. Purchasing Power-Parity is more reliable than exchange rates.

With Great Love,

Er. Amit Yadav

http://www.stayfoolish.in

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