Why Exchange Rates are not reliable?
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