Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar. Suppose that rice is the only commodity in the world. What would happen to the real exchange rate between the United States and Japan?
Is it equal to 1? If not, can anyone please correct me and explain it to me?
THANKS A LOT!!!
Based on commodities, then
1 bushel= 1 bushel or
100 dollars= 16000 yen.
or 1 dollar= 160 yen
Assume that American rice sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the exchange rate is 80 yen per 1 dollar. Explain how you can make a profit in this situation. What would be your profit per bushel of rice?
No, the real exchange rate between the United States and Japan would not be equal to 1 in this scenario. The real exchange rate is determined by the relative prices of goods in each country.
To calculate the real exchange rate, we need to convert the prices in each country to a common currency. In this case, we will convert the prices to yen.
American rice sells for $100 per bushel. To convert this to yen, we multiply by the nominal exchange rate:
100 * 80 = 8,000 yen per bushel of American rice.
Japanese rice sells for 16,000 yen per bushel, which means the relative price of American rice compared to Japanese rice is:
8,000 yen / 16,000 yen = 0.5
Therefore, it would take 0.5 bushels of American rice to purchase one bushel of Japanese rice.
The real exchange rate is the relative price of goods in one country compared to another. In this case, the real exchange rate would be 0.5, indicating that Japanese rice is relatively more expensive compared to American rice.
To determine the real exchange rate between the United States and Japan, we need to consider the nominal exchange rate and the relative price levels of the two countries. In this case, we are given the nominal exchange rate of 80 yen per dollar, the price of American rice at $100 per bushel, and the price of Japanese rice at 16,000 yen per bushel.
To calculate the real exchange rate, we need to find the ratio of the price of Japanese rice to the price of American rice in terms of the same currency. Let's convert the price of American rice into yen using the nominal exchange rate.
Price of American rice in yen = $100 per bushel * 80 yen per dollar = 8,000 yen per bushel.
Now we can calculate the real exchange rate:
Real exchange rate = (Price of Japanese rice in yen) / (Price of American rice in yen)
= 16,000 yen per bushel / 8,000 yen per bushel
= 2
Therefore, the real exchange rate between the United States and Japan is 2.
The real exchange rate is not equal to 1 because it represents the relative prices of goods between the two countries. In this scenario, it indicates that Japanese rice is twice as expensive as American rice after accounting for the nominal exchange rate.