8. According to the graph below, suppose there are two economies Switzerland and Thailand. Both produce watches. The average cost curve for Switzerland is ACS#Iss, the average cost curve for Thailand is ACTHAL DWORLD is the world demand for watches, DTHAI is the domestic demand of Thailand. The equilibrium point of world market is at point 1, the equilibrium price is P, Thailand imports watches from Switzerland. Based on the above information, answer the following questions: Price, cost (per watch) Co P₁ P₂ ACgwiss ACTHA DTH WORLD Quantity of watches produced and demanded (a) Which country has a comparative advantage in watch production? (b) What are the reasons for the watch trade between Thailand and Switzerland? (c) Can the two countries gain from the current watch trade?

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Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.