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Q1 In Your opinion which contemporary international trade theory is most relevant

and practical for the purpose of explaining the reasons for growth in world trade? Give

Reasons for your answers.

Ans.

Gravity Model is most relavant and practical for the purpose of growth in world trade. Thisis explained as follows:The Gravity model of trade presents a more empirical analysis of trading patterns rather thanthe more theoretical models discussed above. The gravity model, in its basic form, predictstrade based on the distance between countries and the interaction of the countries' economicsizes. The model mimics the Newtonian law of gravity which also considers distance and

physical size between two objects. The model has been proven to be empirically strongthrough econometric analysis. Other factors such as income level, diplomatic relationships

between countries.

The gravity model of trade in international economics, similar to othergravity

models in social science, predicts bilateraltrade flowsbased on the economic sizes of (oftenusing GDP measurements) and distance between two units. The model was first used byTinbergen in 1962.[1]The basic theoretical model for trade between two countries (i and j)takes the form of:

Where F is the trade flow, M is the economic mass of each country, D is the distance and G isa constant. The model has also been used in international relationsto evaluate the impactoftreaties andalliances on trade, and it has been used to test the effectiveness of tradeagreements and organizations such as theNorth American Free Trade Agreement(NAFTA)

and the World Trade Organization(WTO).

Q2) Explain with the help of an illustration, how the exchange ratio of trade between

two countries having free trade be determined.

Ans

English philosopher and political economist John Stuart Mill showed that the determinationof the exact after-trade price ratio was a supply-and-demand problem. At each possibleintermediate ratio (within the range of 1:2 and 1:3), country A would want to import a

particular quantity of wine and export a particular quantity of cloth. At that same possibleratio, country B would also wish to import and export particular amounts of cloth and of

wine. For any intermediate ratio taken at random, however, A's export-import quantities areunlikely to match those of B. Ordinarily, there will be just one intermediate ratio at which thequantities correspond; that is the final trading ratio at which quantities exchanged willstabilize. Indeed, once they have stabilized, there is no further profit in exchanging goods.Even with such profits eliminated, however, there is no reason why A producers should wantto stop selling part of their cloth in B, since the return there is as good as that obtained fromdomestic sales. Furthermore, any falloff in the amounts exported and imported wouldreintroduce profit opportunities. In this simple example, based on labour costs, the result iscomplete (and unrealistic) specialization: country A's entire labour force will move to cloth

production and country B's to wine production. More elaborate comparative-advantagemodels recognize production costs other than labour (that is, the costs of land and of capital).

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In such models, part of country A's wine industry may survive and compete effectivelyagainst imports, as may also part of B's cloth industry.

Q3) Multinational corporations are the necessary evils specially for developing

countries. Discuss the above statement with reference to strategic models generally

adopted by MNCs.

Ans.In a globalised world it makes strategic sense for companies to expand their operationsacross national boundaries. They get access to new markets and key resources such asspecialized skills, mineral resources and new sources of information. However theopportunities that comes by their worldwide presence up need to be converted intocompetitive advantage. And for this MNCs need to launch the right strategies, buildorganizational capabilities and manage operations in a diverse, complex and volatilecompetitive international arena.

International strategy scholars have observed that all MNCs do not follow similar strategies.For ease of understanding the model below explains the pre-dominant strategies followed bydifferent MNCs.

The European MNCs followed the Multinational strategies

o Focuses primarily on one of the different means national differences to achieve most of

its strategic objectives.o Focus is on revenue side, by differentiating their products & services in response tocustomer needs, industry characteristics & Govt. regulations.

o Subsidiaries depend on local-for-local innovations, a process to identify local needs anduse its own resources to respond to those needs

o Good for high local responsiveness & where cost-reduction pressures are low. Products areconsumable items where taste and flavor are culture related.

o The weakness in this strategy is that due to the stand-alone philosophy there is littlecross-fertilization of learning and innovation.

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The US MNCs followed the International strategies

o MNCs headquartered in large technologically advanced countries adopted this strategicapproach to exploit home-country innovations.

o Centralize those resources that are key to developing innovations; decentralize others toallow its innovations to be adapted to less advanced countries.

o Go where locals dont have your skills. Power systems, Airplanes, specialized machineryand other Hi-tech equipment.

o Manufacturing and marketing in each location.

o Makes sense where low skills and low competition exist.

The Japanese MNCs followed the Global strategies.

o Utilizes product standardization. Products like watches, music systems, PCs and camerasare global products. Assuming that the consumer looks for functionality, quality and low costonly.

o Best use of experience curve and high efficiencies.

o This is the low cost strategy that depends primarily on developing global efficiency.

o Not good where local responsiveness demand is high.

Q4) Export or physical movements of goods 7 services alone cannot justify internationalbusiness. If so discuss other modes of international business with examples.

Ans.

LICENSING AND FRANCHISING:.

Many companies enter into international licensing agreements, allowing other countriesaround the world to use their assets (ie: trademarks, patents, copyrights, or expertise) undercontract, receiving royalty payments in return. Similarly, many companies engage infranchising, a mode of business where the franchisor allows the franchisee to use a trademark

that is an essential part of the franchisee's business. For example, Gloria Vanderbilt hasfranchised her name out to several clothing companies, forming the Gloria Vanderbilt line.The franchisor also assists on a continuing basis in the operation of the business-for example,

by providing components, management services, and technology.

TURNKEY OPERATIONS& MANAGEMENT CONTRACTS:

Companies also pay fees that may be incurred on an international level for engineeringservices handled through turnkey operations and management contracts. A turnkey operationinvolves construction of facilities, performed under contract, which is then transferred to the

owner when the company is ready to begin operating. Management contracts are initiatedwhen one company supplies personnel to perform general or specialized management

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functions for another company. This is most evident in Disney's theme parks in France,Japan, and China.

DIRECT AND PORTFOLIO INVESTMENT:

International business occurs within direct and portfolio investments. By investing in aforeign company, the investor takes ownership in a foreign property for a financial return. Aforeign direct investment (the more common of the two) gives the investor a controllinginterest in the foreign company. When two or more companies share in an FDI, it is known asa joint venture. When a government joins a company in an FDI, it becomes a mixed venture.Conversely, a portfolio investment is a noncontrolling interest in a company that usuallyinvolves either taking stock in a company or making loans to a company in the form of

bonds, bills, or notes that the investor purchases. Portfolio investments are particularlypopular with multinational enterprises as they offer a safe means towards short-term financialgain.

In a globalised world it makes strategic sense for companies to expand their operations acrossnational boundaries. They get access to new markets and key resources such as specializedskills, mineral resources and new sources of information. However the opportunities thatcomes by their worldwide presence up need to be converted into competitive advantage.And for this MNCs need to launch the right strategies, build organizational capabilities andmanage operations in a diverse, complex and volatile competitive international arena.

International strategy scholars have observed that all MNCs do not follow similar strategies.For ease of understanding the model below explains the pre-dominant strategies followed bydifferent MNCs.

Q5)WTO was formed to foster Int. trade . State the principle objective of WTO and listat least 10 activities monitored by WTO. Discuss the impact of WTO on india and other

developing nations with special reference to Hong kong Ministerial conference.

Ans

The main overall moto of WTO is to promote and ensure the international trade in themember countries with the mantra of LIBERELISATION, PRIVATISATION ANDGLOBALISATION.

Beside this the WTO has following some key objectives Trade without discrimination

To set and enforce rules for international trade,

To provide forum for negotiating and monitoring the international trade

To resolve trade disputes,

To increase the transparency of decision-making processes

To cooperate with other major international economic institutions involvedin global economic management

To help developing countries benefit fully from the global trading system.

Activities of WTO Reviewing Member Nations' Trade Policies

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Settling Trade Disputes Training and Technical Instruction to Developing Countries Participation in Global Economic Policy-Making Implementation and monitoring Building trade capacity Outreach

Agriculture in Meghalaya*: Meghalaya's economy is basically agricultural with about 80% ofits total population (17.8 lakh) depending entirely on Agriculture for their livelihood. It hasan area of 22429 sq kms. Of the total area about 10% only is used for cultivation. Rice is themain crop. The important crops of the state are potato and maize. It also grows someimportant cash crops such as rubber, coffee, jute, ginger, mustard, sugarcane, chillies, etc.These crops are produced in substantial quantities and are being marketed in adjoining states.Meghalaya is important for cultivation of fruits like pineapples, oranges, bananas, etc. Apartfrom the above the State have achieved signal success in the cultivation of non-traditionalcrops like Tea, Cashewnut, Oilseeds, Tomato, Mushroom, Wheat, etc. Only about 18% of thecultivated land is irrigated.

The total cropped area in the State has almost doubled in the last 30 years. Food grainproduction sector covers about the 2/3rd area under cultivation. About 45 percent of the totalarea under paddy, wheat and maize use high-yielding variety seeds. The productivity hasincreased tremendously with the introduction of HYV seeds - from 1200 kgs/ha to 2300kgs/ha in case of (HYV) rice, from 534 kgs/ha to 1218 kgs/ha of Maize and from 611 kgs/hato 1508 kgs/ha of Wheat during the 1971- 2000 period.

Q.6 ) Why Rupee strengthening with respect to dollar in the last few weeks?What are

the tools available to Indian export companies to protect them from the risk of fallingdollar?

Ans:- The rupee strengthened against the dollar over the past week tracking equity marketsand a strong euro. Continuing to reiterate faith in Indian equity, foreign institutional investors

bought equities worth $600 million over the past week. Demand for dollar from importerskept the rally in check.

The crisis in Greece continued to loom large over the global forex markets. The euro

strengthened further after European Central Bank president, Mr Jean-Claude Trichet, said hewas willing to sanction bond rollovers in Greece. The European currency is up over 5 percent since its May 23 trough, applying pressure on the greenback.

The dollar index continued to decline. Next support for this index is between 72.8 and 73.Once this support is breached, the index can head towards the zone between 71 and 72 whereit halted in March 2008.

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DOLLAR-RUPEE OUTLOOK

The rupee continued to strengthen. It moved above our first resistance at 44.8 to record thepeak of 44.6 on Tuesday. We stay with the next target for the currency at 44.5. The currentrally will gain momentum only if the rupee closes above 44.5. That will open the path for the

currency appreciating to 44.2 or 44 over the medium-term.

Supports for the days ahead will be at 44.9, 45 and 45.1. Short-term trend will reversedownward only if the currency closes below 44.9.

USD-INR FUTURES

USD-INR futures moved contrary to our expectation to decline to 44.8 on Tuesday. Thefuture has downward supports at 44.8 and 44.6. Traders should be ready to face a bounce

from either of these levels. Short-term resistances are at 45 and 45.2. Fresh longs are advisedonly on a close above 45.

Q7) "MODERN TRADE THEORIES ARE ESSENTNL RON RORMUTATTNG BUZ

$TRATEGIES AT MACRO LEVEL IN COMPANIES". DISCUS IN DETAIL THREE

RELEVENT THEORIES,SHORT NOTES.

1. Resources and Trade (The Eli Heckscher and Bertil Ohlin Model):

The Heckscher-Ohlin theory explains why countries trade goods and services witheach other, the emphasize being on the difference of resources between two countries. This

model shows that the comparative advantage is actually influenced by the interaction betweenthe resources countries have (relative abundance of production factors) and productiontechnology (which influences the relative intensity by which the different production factorsare being utilized during the production cycle.

The model starts with the presumption that country A produces two products: food (X)and textiles (Y). These two kinds of production need two different inputs, territory (T) andlabour (L), which are available in limited quantities. In the same time, food production (X)requires more land, so it can be said it is territory intensive and textile (Y) productionrequires more labour, being in this way labour intensive.

According to the Heckscher-Ohlin theory, trade makes it possible for each country tospecialize. Each country exports the product the country is most suited to produce inexchange for products it is less suited to produce. In our case, country A is relative abundantin territory (T) and will specialize in producing food (X) and country B is relative abundant inlabour (L) so it will specialize in producing textiles (Y). In this case, trade may benefit bothcountries involved.

.

2. Specific Factors and Income Distribution (Paul Samuelson - Ronald JonesModel) :

There are at least two reasons why trade has an important influence upon the incomedistribution:

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a) resources cant be transferred immediately and without costs from one industry toanother.

b) industries use different factors and a change in the production mix a country offerswill reduce the demand for some of the production factors whereas for others it will increaseit.

Paul Samuelson and Ronald Jones, two American economists, elaborated a trade modelbased on specific factors. This is a tri-factorial model because it is based on 3 factors: labour(L), capital (K) and territory (T). Products like food (X) are made by using territory (T) andlabour (L) while manufactured products (Y) use capital (K) and labour (L). From this simpleexample it is easy to observe that labour (L) is a mobile factor and it can be used in bothsectors of activity, while territory and capital are specific factors.

A country having capital abundance and less land tends to produce more manufacturedproducts than food products, whatever the price, while a country with a territory abundancetends to produce more food. If the other elements are constant, an increase in capital willmean an increase in marginal productivity from the manufactured sector, while a rise in theoffer of territory will increase the production of food in the detriment of manufacturers.

When the two countries decide to trade, they create an integrated global economy whosemanufacture and food production is equal with the sum of the two countries productions. If acountry doesnt trade, the production for a good equals the consumption.The gains from trade are bigger in the export sector of every country and smaller in the sectorcompeted by imports.

3. The Standard Model of Trade (Paul Krugman Maurice Obsfeld Model) :

The standard model of trade implies the existence of the relative global supply curve resultingfrom the production possibilities and the relative global demand curve resulting from thedifferent preferences for a certain good.The exchange rate (the rapport between the export prices and the import prices) is determined

by the crossing/intersection between the two curves, the relative global supply curve and therelative global demand curve. If the other elements remain constant, the exchange rateimprovement for a country implies a substantial rise in the welfare of that country.Q.8 Doing Business with expanded ASEAN.

Ans:- US-ASEAN Business Council Introduces Its First ASEAN Committee(Manado,

Indonesia, 13 August 2011)

The US business community expanded its commitment to Southeast Asia today by launchingthe US-ASEAN Business Councils first official ASEAN Working Committee during theUS-ABCs annual delegation to the 43rd ASEAN Economic Ministers (AEM) Meeting andRelated Meetings held here this week and ended today.The Committee, chaired by Mr SamKim of Procter & Gamble, will channel US private sector support for ASEAN EconomicIntegration and capacity building for ASEAN and its Member States.

Minister Dr Mari Elka Pangestu, who is the AEM Chair this year and also the Minister ofTrade of Indonesia, informed the representatives of the Council that the AEM and the USTrade Representatives (USTR) have agreed to organise a road show to the US to promote

ASEAN to the US business community; as well as an ASEAN-US Business Forum inASEAN next year.

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It is crucial to include both government and business sectors in such initiatives to strengthenand deepen economic integration between ASEAN and the United States. The BusinessForum is expected to focus on the selected business sectors that ASEAN and US have mutualinterests, among others, Minister Mari said.

The Council announced the formation of the Committee during its dialogue with the AEMand the Deputy USTR, Ambassador Demetrious Marantis. The Council is the only US-basedorganisation which attends the ASEAN Economic Ministers Meeting every year.

This is a crucial moment for ASEAN, said Mr Kim. The ASEAN Member States haverecognised the work they need to do to break down barriers to trade in the region, and havelaid some impressive groundwork. The key now is for ASEAN to continue successfullyimplementing its plans for greater integration, which includes executing the ASEAN SingleWindow, the Logistics Roadmap, and harmonising standards throughout the region. The US-ASEAN Business Councils ASEAN Committee will organise the US private sectorssupport for these efforts.

He added that US investments in ASEAN also help create conducive environment for theSmall- and Medium- Enterprises (SMEs), too.

Secretary-General of ASEAN, Dr Surin Pitsuwan pointed that out of twenty US companiesdelegations based in ASEAN, at least six companies have established ASEAN department or

business units. This underscores the importance of ASEAN region to the US companies.

Dr Surin also urged the US companies to share their success stories in doing business in

ASEAN and promote them through the media.

ASEANs successful integration will create a single market of 600 million people making itthe worlds third largest market, said Council President Alexander Feldman. The Councilhas been working with ASEAN for 26 years, but in the intensification of economicintegration this is the perfect time to step up our engagement. ASEAN is on the verge of

becoming a global household name, and the US private sector is committed to supportingASEANs growth, through capacity building for SMEs and initiatives focused on key growthsectors like infrastructure, consumer products, healthcare, defense, and ICT.

The Councils 12-company delegation to the 43rd AEM Meeting and Related Meetings thisyear consists of Procter & Gamble, Hewlett-Packard, Johnson & Johnson, Cargill, FedExExpress, GE, Google, Intel, Microsoft, Syngenta, UPS, and White & Case.

Q9) David Ricardos 2 country- 2 product.

Ans:- The Ricardian theory of international trade

The Ricardian theory of comparative advantage also became a basic constituent of

neoclassical trade theory. Any undergraduate course in trade theory includes expansions of

Ricardo's example of four numbers in for form of a two commodity, two country model.

Ricardo intended to show by this classic example the benefits of free trade from comparative

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advantage, as in his example there is one country that is more proficient in producing both

commodities relative to the other country. Adam Smith would likely reason, by logic of

absolute advantage, that there would be no incentive for trade between the two countries.

This model was expanded to many-country and many-commodity cases and also to include

migration of people between countries. Major general results were obtained by the beginning

of 1960's by McKenzie and Jones, including his famous formula.

Contemporary theories

Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer,

and Samuelson This formulation is employed for example by Matsuyama and others.

Neo-Ricardian trade theory

Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian

trade theory. The main contributors include Ian Steedman (1941) and Stanley Metcalfe(1946). They have criticised neoclassical international trade theory, namely the Heckscher-

Ohlin model on the basis that the notion of capital as primary factor has no method of

measuring it before the determination of profit rate (thus trapped in a logical vicious

circle). This was a second round of the Cambridge capital controversy, this time in the field

of international trade.

The merit of neo-Ricardian trade theory is that input goods are explicitly included to the

analytical framework. This is in accordance with Sraffa's idea that any commodity is a

product made by means of commodities. The limit of their theory is that the analysis islimited to small country cases. The wage of the Rest of the World is determined by

assumption and there is no internal mechanism which generates international wage

differences. In this sense the neo-Ricardian trade theory lacks international value theory.

Ricardo-Sraffa trade theory

Traded intermediate goods

Ricardian trade theory ordinarily assumes that the laboris the unique input. This is a great

deficiency as trade theory, for the intermediate goods occupy the major part of the world

international trade. Yeats found that 30% of world trade in manufacturing is intermediateinputs. Bardhan and Jafe found that intermediate inputs occupy 37 to 38% in the imports to

the US for years 1992 and 1997, whereas the percentage of intrafirm trade grew from 43% in

1992 to 52% in 1997.

Q10) Political Risk Analysis:

The risk that an investment's returns could suffer as a result of political changes or instability

in a country. Instability affecting investment returns could stem from a change ingovernment, legislative bodies, other foreign policy makers, or military control. Political

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risks are notoriously hard to quantify because there are limited sample sizes or case studieswhen discussing an individual nation.

Political Risk Analysis provides customised assessments of political risks for organisationsthat invest/ operate in (or extricate from) challenging regions.

Foreign Direct Investment (F.D.I.) continues to grow in emerging markets, some of whichcan be hazardous. Consequently, war, civil conflict, terrorism, insurgency, social unrest, andcrime can cause fatalities, injuries, damage, and loss for the people, assets, operations,reputations, and environments of transnational businesses and Non GovernmentalOrganisations (N.G.O.s) that have interests in these dangerous environments.Analysis of the politics of these volatile areas provides management with a qualified andquantified assessment of the likelihood of the occurrence of such threats and the consequent

level of impacts on their organisations. This political risk analysis can then be applied bymanagement to mitigate the level of damage by strengthening organisational vulnerabilities.

If political risk analysis is not undertaken and subsequently maintained as an integral part ofbusiness planning, organisational vulnerabilities cannot be identified and consequentlystrengthened and levels of impact cannot then be reduced or negated. An organisation would,therefore, be more exposed than necessary to political risk. Thus, political risk analysis iscritical for effective business planning from Board to project level.

Q11) Three modes of doing international business other than imports&exports?

LICENSING AND FRANCHISING:.

Many companies enter into international licensing agreements, allowing other countriesaround the world to use their assets (ie: trademarks, patents, copyrights, or expertise) undercontract, receiving royalty payments in return. Similarly, many companies engage infranchising, a mode of business where the franchisor allows the franchisee to use a trademarkthat is an essential part of the franchisee's business. For example, Gloria Vanderbilt hasfranchised her name out to several clothing companies, forming the Gloria Vanderbilt line.The franchisor also assists on a continuing basis in the operation of the business-for example,

by providing components, management services, and technology.

TURNKEY OPERATIONS& MANAGEMENT CONTRACTS:

Companies also pay fees that may be incurred on an international level for engineeringservices handled through turnkey operations and management contracts. A turnkey operationinvolves construction of facilities, performed under contract, which is then transferred to theowner when the company is ready to begin operating. Management contracts are initiatedwhen one company supplies personnel to perform general or specialized managementfunctions for another company. This is most evident in Disney's theme parks in France,Japan, and China.

DIRECT AND PORTFOLIO INVESTMENT:

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International business occurs within direct and portfolio investments. By investing in aforeign company, the investor takes ownership in a foreign property for a financial return. Aforeign direct investment (the more common of the two) gives the investor a controllinginterest in the foreign company. When two or more companies share in an FDI, it is known asa joint venture. When a government joins a company in an FDI, it becomes a mixed venture.

Conversely, a portfolio investment is a noncontrolling interest in a company that usuallyinvolves either taking stock in a company or making loans to a company in the form of

bonds, bills, or notes that the investor purchases. Portfolio investments are particularlypopular with multinational enterprises as they offer a safe means towards short-term financialgain.

Q12)SAARC & SAFTA

Ans : SAARC:-

The SOUTH ASIAN ASSOCIATION OF REGIONAL CORPORATION is an organization

of SOUTH ASIAN nations, founded in December 1985 and dedicated to economic,technological, social and cultural development emphasizing collective self reliance.

The seven founding members are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan andSri Lanka. Afghanistan joined in the year 2005. Its headquarters are in Kathmandu, Nepal.

In the year 1993, SAARC countries signed an agreement to gradually lower the tariffs withinthe region of Dhaka.

In 2004, in the 12th summit at Islamabad SAARC countries devised the SOUTH ASIA FREE

TRADE ASSOCIATION which referred to establishment of free trade area. This agreementwent into force on January 1st 2008. Under this agreement, SAARC members will bring theirduties down to 20% by 2009.

SAFTA

South Asian Free Trade Area

Over the years, the SAARC members have expressed their unwillingness on signing a free

trade agreement. Though India has several trade pacts with Maldives, Nepal, Bhutan and SriLanka, similar trade agreements with Pakistan and Bangladesh have been stalled due topolitical and economic concerns on both sides. In 1993, SAARC countries signed anagreement to gradually lower tariffs within the region, in Dhaka. Eleven years later, at the12th SAARC Summit at Islamabad, SAARC countries devised the South Asia Free TradeAgreement which created a framework for the establishment of a free trade area covering 1.6

billion people. This agreement went into force on January 1, 2008. Under this agreement,SAARC members will bring their duties down to 20 per cent by 2009.

The Agreement on South Asian Free Trade Area (SAFTA) is an agreement reached onJanuary 6, 2004 at the 12th SAARC summit in Islamabad, Pakistan. It created a free trade

area of 1.6 billion people in Bangladesh, Bhutan,India, Maldives, Nepal,Pakistan and Sri

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Lanka. The seven foreign ministers of the region signed a framework agreement on SAFTAto reduce customs duties of all traded goods to zero by the year 2016.

The SAFTA agreement came into force on January 1, 2006 and is operational following theratification of the agreement by the seven governments. SAFTA requires the developing

countries in South Asia (India, Pakistan and Sri Lanka) to bring their duties down to 20percent in the first phase of the two year period ending in 2007. In the final five year phaseending 2012, the 20 percent duty will be reduced to zero in a series of annual cuts. The leastdeveloped nations in South Asia (Nepal, Bhutan, Bangladesh and Maldives) have anadditional three years to reduce tariffs to zero. India and Pakistan have signed but not ratifiedthe treaty

Q13) Current trends and application of Purchasing Power Parity.

Ans:- Purchasing Power Parity:Purchasing power parity (PPP) is a measure of long-term equilibrium exchange rates based on relative price levels of two countries. The idea

originated with the School of Salamanca in the 16th century and was developed in its modernform by Gustav Cassel in 1918. The concept is founded on the aw of one price, the idea thatin absence of transaction costs and official barriers to trade, identical goods will have thesame price in different markets when the prices are expressed in terms of one currency.

PPP measurement:-The PPP exchange-rate calculation is controversial because of thedifficulties of finding comparable baskets of goods to compare purchasing power acrosscountries. Estimation of purchasing power parity is complicated by the fact that countries donot simply differ in a uniformprice level; rather, the difference in food prices may be greater

than the difference in housing prices, while also less than the difference in entertainmentprices. People in different countries typically consume different baskets of goods. It isnecessary to compare the cost of baskets of goods and services using a price index. This is adifficult task because purchasing patterns and even the goods available to purchase differacross countries. Thus, it is necessary to make adjustments for differences in the quality ofgoods and services. Additional statistical difficulties arise with multilateral comparisonswhen (as is usually the case) more than two countries are to be compared.

Current Trends and application:-

Indian Purchasing Power Parity to overtake Japan by 2025:- At current growthrate, Indias Purchasing Power Parity (PPP) is set to overtake Japan by 2025 to rankthird only after US and China. This prediction came from none other than Governorof BoJ (Bank of Japan), Toshihiko Fukui.

Worldwide Purchasing Power & Earnings:

Price Levels

Oslo, Zurich and Copenhagen have the highest prices of the 73 cities comparison. Including

rent (and energy), which accounts for roughly one quarter of the cost of living. While

http://en.wikipedia.org/wiki/Sri_Lankahttp://en.wikipedia.org/wiki/Duty_(economics)http://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Developing_countryhttp://en.wikipedia.org/wiki/Developing_countryhttp://en.wikipedia.org/wiki/Least_developed_countryhttp://en.wikipedia.org/wiki/Least_developed_countryhttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/School_of_Salamancahttp://en.wikipedia.org/wiki/Gustav_Casselhttp://en.wikipedia.org/wiki/Law_of_one_pricehttp://en.wikipedia.org/wiki/Market_baskethttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Purchasing_power_parityhttp://en.wikipedia.org/wiki/Sri_Lankahttp://en.wikipedia.org/wiki/Duty_(economics)http://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Developing_countryhttp://en.wikipedia.org/wiki/Developing_countryhttp://en.wikipedia.org/wiki/Least_developed_countryhttp://en.wikipedia.org/wiki/Least_developed_countryhttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/School_of_Salamancahttp://en.wikipedia.org/wiki/Gustav_Casselhttp://en.wikipedia.org/wiki/Law_of_one_pricehttp://en.wikipedia.org/wiki/Market_baskethttp://en.wikipedia.org/wiki/Price_levelhttp://en.wikipedia.org/wiki/Price_indexhttp://en.wikipedia.org/wiki/Purchasing_power_parity

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Mumbai, Delhi, Manila, Kaula Lumpur and Cairo have the lowest prices of all the 73 cities.

As per the survey, the city rankings have changes since 2006 reviews. For Example, London

which was 2nd most expensive place moved down 20 places due to Pounds steep

devaluation over last year.

Wage Earnings:

In all of 73 international cities the employees in Copenhagen, Zurich, Geneva and New

York had the highest gross earnings. The undisputed champion in international wage

comparison is Zurich. Net incomes are higher there than in any other city in the world. With

its extremely high gross wages and comparatively low tax rates, Switzerland is a very

employee-friendly country.

One the other hand, in line with price levels, lowest average wage earnings were found in

the cities of Delhi and Mumbai, and in Jakarta, Indonesia, and Manila, the Philippines.

Domestic Purchasing Power

This probably is the most important factor that should be seen while looking at overall cost of

Living. Purchasing Power can be determined by dividing the average annual salary by the

total price of goods and services. This tells us how much purchasing power local wages have

and then compare which will reflect the rankings more accurately. People in Zurich can buy

the most goods after paying taxes and social security contributions, followed by Sydney,

Luxembourg, Dublin and Miami. Again, Mumbai comes in last 5 cities in these rankings.

So even if prices are low, wage earning are low as well and when coupled with taxes the

purchasing power of people in Mumbai is one of the lowest!