Often people wonder why currency exchange rates are what they are. Even though the currency of various countries is traded as a commodity, the exchange rate is pegged based on certain economic metrics. Here I present a range of metrics and my reasoning on how these metrics affect the exchange rate between two currencies.
Let us examine the currency exchange rate between the United States Dollar and the Indian Rupee.
The current exchange rate is: 1 USD = 82.83 INR
Let me try and explain why this may be so.
The US GDP for 2022 was $ 25.46 trillion and the US population was 333.29 million
The GDP for India in 2022 was $ 3.5 trillion and the population was 1.42 billion or 1420 million
The ratio of the US GDP to the GDP of India in 2022 was: 7.27: 1
The ratio of the US population to the population of India in 202 was: 1: 4.26
If these were considered factors that worked together, the factored ratio between the US and India for purchasing power parity would be: 30.97: 1
The ratio of the purchasing power parity in the currency of the two counties currently is 23: 1, so there is a gap.
The purchasing power parity for India was less, (0.74) of what it should be.
The US produced its GDP with 0.235 of the population of India, so its parity production of GDP would be: $108.47 trillion
India produced its GDP with 4.26 times the population of the US, so its parity production of GDP would be: $0.82 trillion
So a parity ratio would be: 1: 132.28 This should have been the exchange rate (USD to INR) in 2022.
The maximum exchange rate in 2022 was: 1 USD = 82.996 INR, so there is a gap.
The exchange rate for India was (0.62) of what it should be.
Compare this to the gap in the purchasing power parity ratio.
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