Explain the automatic mechanism by which BOP equilibrium was achieved under the gold standard.
Under Gold Standard System gold was taken as a common unit to measure the currencies of other countries, which means the value of every currency was defined in terms of gold.
The exchange rate in open market was determined by it's worth in terms of the value of gold. However the upper and lower limits were fixed within which it fluctuated.
Under Gold Standard System the exchange rates became stable and all countries maintained a proper stock of gold so as to exchange currency.
Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in terms of Indian goods). (Hint: First find out the nominal exchange rate as a price of yen in rupees).