Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
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11 
 
 
OPEN ECONOMY MACRO ECONOMICS-II 
 
 
Unit Structure 
 
12.0 Objectives 
12.1 Introduction 
12.2 Purchasing Power Parity theory 
12.3 Disequilibrium in Balance of payment 
12.4 Measures of correcting BOP problem 
12.5 Balance Of Payment Adjustments 
12.6 Currency crisis 
12.7 Summary 
12.8 Questions 
11.0 OBJECTIVES 
To learn Purchasing Power parity theory of determining 
exchange rate. 
To understand various factors causing disequilibrium condition 
in BOP. 
To know various measures of correcting BOP deficit. 
To know BOP adjustments with special reference to Devaluation 
To know and understand the term currency crisis. 
11.1 INTRODUCTION 
 
In this unit we are going to learn PPP theory of determining 
exchange rate. We shall also learn about Balance of payment 
deficit position, its causes and various measures taken by 
Government and Monetary authorities for correcting the same. We 
shall understand the effect of Devaluation on the BOP position. 
Reasons for currency crisis will also focused in this unit. 
11.2 
PURCHASING 
POWER 
PARITY 
THEORY
(PPP THEORY)
 
Purchasing power parity theory: 
This theory has been restated by the Swedish economist 
Gustav Cassel in 1916, exactly in the years following the First 
World War, when the exchange rates are free to fluctuate the rate 

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of exchange between two currencies in the long run will be 
determined by their respective purchasing powers. According to 
him: 
―The rate of exchange between two currencies must stand