Class 12 Macro Economics - Chapter Open Economy Macroeconomics NCERT Solutions | Suppose the exchange rate between the Ru
Suppose the exchange rate between the Rupee and the dollar was Rs. 30=1$ in the year 2010. Suppose the prices have doubled in India over 20 years while they have remained fixed in USA. What, according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030.
In a closed economy, savings and investments are equal at equilibrium level of income.
However, in an open economy savings and investments differ.
Y = C + I + G + X - M
Or, Y = C + I + G + NX [As NX = X - M]
Or, Y - C - G = I + NX
Or, S = I + NX
Savings in an economy include private savings (Sp) and government savings (Sg).
So, Sp + Sg - I
Or, NX =Sp+ Sg – I
SP = Y - C - T SR = T - G
Or, NX = (Y - C - T) + (T - G) - I
Or, NX = Y - C - T +T - G - I
Or, NX = Y - C - G - I
Or, G = Y - C - I - NX
Or, G - T = Y - C - I - NX - T [Subtracting T from both sides]
Or, G - T = Y - C - T - I - NX
Or, G - T = (Sp - I) - NX
Or, G - T = (Sg- I) - (X - M) [NX = X - M]
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