Overvalued and undervalued currencies

In India Rs.25 can get one kilogram of good quality rice. In United States of America US$ 1 can buy one kg of comparable quality of rice. The rice being same in both cases, US$1 should be equal to Rs.25. But one can get in the banks or elsewhere about Rs.50 for 1 US$. This means that Indian Rupee is undervalued by 2 times. In some other cases 1 US$ may be equal to Rs.50 or Rs.20 or so. When we take the value of the total production of goods and services, i.e. GDP.we get an idea of how much the currency of a country is undervalued or overvalued. International Financial organisations like IMF, compute the GDP of a country both in nominal terms ie. on the basis of rates of exchange and on Purchasing Power Parity (PPP) terms. From these figures we find that while currencies of most of the developed countries are overvalued, the currencies of the developing countries are generally undervalued.

The major countries whose currencies are undervalued are:

1.India by 2.8 times
2.Iran by 2.2 times
3.Taiwan by 2.2 times
4.China by 1.9 times
5.Mexico by 1.7 times
6.Russia by 1.6 times
7.South Korea by 1.6 times
8.Poland by 1.6 times
9.Turkey by 1.6 times
10.Indonesia by 1.6times

The overvalued major currencies are those of:

1.Australis 1.4 times
2.Canada 1.2 times
3.Japan 1.2 times
4.Italy 1.2 times
5.France 1.2 times

In the past Indian Rupee was undervalued by 3-4 times. As the economy expands,the currency becomes stronger. May be in the coming years, as the economy expands,Indian Rupee may not be so much undervalued as now. This will mean that the imported goods may not be so much costly as now.

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