Assume that American rise sells for $100 per bushel, Japanese rice sells for 16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.

Explain how you could make a profit from this situation. What would be your profit per bushel of rice? If other people exploit the same opportunity, what would happen to the price of the rice in Japan and the price of rice in the United States?

Suppose that rice is only commodity in the world what would happen to the real exchange rate between the United States and Japan?

In this situation, you could make a profit by exploiting the difference in rice prices between the United States and Japan, known as arbitrage. Here's how:

1. Buy American rice for $100 per bushel.
2. Exchange dollars to yen at the nominal exchange rate of 80 yen per dollar (100 USD * 80 yen/USD = 8000 yen).
3. Use the 8000 yen to buy 0.5 bushel of Japanese rice (8000 yen / 16,000 yen/bushel).
4. Sell the 0.5 bushel of Japanese rice equivalent to 1 bushel of American rice for $100 in the United States.

Your profit per bushel of rice would be $100 - $100 * (8000 yen / 16,000 yen) = $100 - $50 = $50.

If other people exploit the same opportunity, the demand for American rice would increase, and the demand for Japanese rice would decrease. This would lead to an increase in the price of American rice and a decrease in the price of Japanese rice until the arbitrage opportunity disappeared.

If rice were the only commodity in the world, the real exchange rate between the United States and Japan would adjust to equalize the prices of rice in the two countries. The real exchange rate is the rate at which goods in one country can be exchanged for goods in another country, taking into account both the nominal exchange rate and the prices of goods in both countries.

In this case, the real exchange rate would be: (Price of American rice / Price of Japanese rice) * Nominal Exchange Rate = (100 USD / 16,000 yen) * 80 yen/USD = 0.5. That means, 1 bushel of American rice would be equivalent to 0.5 bushel of Japanese rice.

To make a profit from this situation, you could take advantage of the price difference between American rice and Japanese rice.

Since the nominal exchange rate is 80 yen per dollar, you would convert the $100 American rice price into yen. So, $100 x 80 yen per dollar = 8,000 yen per bushel of American rice.

Comparing this to the Japanese rice price of 16,000 yen per bushel, you could buy American rice for 8,000 yen, sell it in Japan for 16,000 yen, and make a profit of 8,000 yen per bushel.

If other people start exploiting the same opportunity, the increased demand for American rice and decreased demand for Japanese rice in Japan would likely lead to an increase in the price of rice in Japan and a decrease in the price of rice in the United States.

Now, assuming rice is the only commodity in the world, the real exchange rate between the United States and Japan would be affected by the difference in price levels between the two countries. If the price level in Japan remains the same while prices in the United States increase due to increased demand for American rice, the real exchange rate would depreciate for the United States relative to Japan. This means that the purchasing power of the dollar would decrease compared to the yen, making Japanese rice relatively more expensive for American buyers. On the other hand, the real exchange rate for Japan would appreciate, making American rice relatively cheaper for Japanese buyers.

To determine how to make a profit from this situation, we need to understand the concept of arbitrage. Arbitrage is the practice of taking advantage of price differences in different markets to make a profit. In this case, we can use the price difference between American and Japanese rice to our advantage.

Given the information provided:
- American rice sells for $100 per bushel.
- Japanese rice sells for 16,000 yen per bushel.
- The nominal exchange rate is 80 yen per dollar.

To make a profit, we can convert dollars to yen and purchase Japanese rice at the lower cost in yen, then sell it in the American market at the higher price in dollars. Here's how you can calculate your profit per bushel:

1. Convert the American rice price from dollars to yen:
$100 * 80 yen/dollar = 8,000 yen.

2. Compare the American rice price (8,000 yen) with the Japanese rice price (16,000 yen). Since the Japanese rice price is higher, we can see that there is a price difference that can be exploited.

3. Exchange your dollars for yen by converting $100 to yen:
$100 * 80 yen/dollar = 8,000 yen.

4. Purchase one bushel of Japanese rice with 8,000 yen.

5. Sell the purchased Japanese rice in the American market for $100.

Since you've purchased the Japanese rice for 8,000 yen and sold it for $100 (which is equivalent to 8,000 yen), you would not make a profit. However, you would earn an equal amount in both currencies.

If other people also exploit this opportunity, the increased demand for Japanese rice would drive up its price in Japan, while the increased supply of American rice in the United States would decrease its price. The price of rice in Japan would rise, and the price of rice in the United States would fall, possibly narrowing the price difference between the two markets.

If rice were the only commodity in the world, the real exchange rate between the United States and Japan would be affected by factors like inflation rates, productivity, and demand for rice in both countries. Changes in these factors would impact the relative purchasing power of each currency and thus affect the real exchange rate. However, it is difficult to predict the specific outcome without more information.