Reference no: EM131381383
Suppose that you share an apartment with a roommate and in order to succeed at university you pay monthly for tutoring. You have an old computer and now with the introduction of tablets, you are considering buying the new Microsoft Surface. You live far away from the university and you commute every day, consuming approximately 30 gallons of gas per month. The prices of renting an apartment, tutoring, the Microsoft Surface and gas in the U.S. and India are given below for years 2015 and 2016.
For the following questions, consider a basket of annual rent, annual tutoring cost, 1 Microsoft Surface/year and annual cost of gas.
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US Dollars
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Indian Rupees
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2015
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2016
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2015
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2016
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Monthly rent for a two bedroom apartment
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$1,300
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$1,450
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Rs 4,000
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Rs 4,200
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Monthly Tutoring
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$240
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$240
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Rs 1,200
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Rs 1,300
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Microsoft Surface Pro
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$1,100
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$1,155
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Rs 55,000
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Rs 58,850
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Gas per gallon
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$4.00
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$4.49
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Rs 240
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Rs 270
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a) Using 2011 and 2012 data for the above basket, calculate the rates of inflation in the U.S. and India. [Hint: Clearly identify the reference "basket" of goods first and then calculate how much it would cost to buy that basket of goods in 2015 and 2016
b) Suppose you only have access to a local tutor. State which of the above goods (rent, tutoring, Microsoft Surface and gas) are likely to be tradable and which are not. Calculate market exchange rate in Rs/$ using these criteria of tradable and non-tradable and the 2015 data
c) Calculate PPP-adjusted exchange rate in 2015 and 2016. Did this rate change between 2015 and 2016? Why or why not?
d) Suppose that in 2015, GDP per capita was roughly $48,100 in the U.S. and Rs 82,000 in India. Calculate Indian GDP in dollars first using market exchange rate and then using PPP-adjusted rate. Does the use of market exchange rate overstate or understate the social welfare in India? Why is that the case?
e) Now suppose that your friend told you about online tutoring services offered by an Indian company. Given that your tutoring options are no longer limited to local tutors, calculate the 2015 market exchange rate using information for above goods. Is the new exchange rate higher or lower the one you calculated in part (b)? How do you explain the difference between the new exchange rate and the one in part (b)?
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