Question

A pair of jeans cost $25 in the U.S. and 1600 dinar in Algeria. If the nominal exchange rate is 75 dinar per U.S. dollar, then the real exchange rate is

Answer 1

Answer:

1.172 US pair of jeans/Algeria pair of jeans

Explanation:

The real exchange rate correlates the price of the same good in two different countries. In this case, the good is a pair of jeans.

The real exchange rate is given by:

$RER=Nominal\ Rate*\frac{Cost\ of\ jeans(US)}{Cost\ of\ jeans(Algeria)} \\RER = \frac{75\ dinar}{\ }* \frac{\ 25}{1600}\\ RER = 1.172\ US\ jeans/Algeria\ jeans$

The real exchange rate is 1.172 US pair of jeans/Algeria pair of jeans.

Answer 2

Based on the cost of jeans in the U.S. and Algeria, the real exchange rate is d. more than one, so a profit could be made by buying jeans in the U.S. and selling them in Algeria.

The real exchange rate is calculated as:

= Nominal exchange rate x Price in foreign country / Price in home country

= 75 x 25 / 1,600

= 1.17

The real exchange rate is 1. This means that you can buy the goods abroad and sell locally.

You can buy the jeans in the U.S. for $20 which should be:

= 20 x 75

= 1,500 dinar

And sell it for 1,600 which gives a profit.

In conclusion, the real exchange rate is more than 1.

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