Question

Consider a basket of consumer goods that costs $80 in the United States. The same basket of goods costs GHS 24 in Ghana.Holding constant the cost of the basket in each country, compute the real exchange rates that would result from the two nominal exchange rates in the following table.Cost of Basket in U.S (Dollars) Cost of Basket in China (Yuan) Nominal Exchange Rate (Yuan per dollar) Real Exchange Rate (Baskets of Chinese goods per basket of U.S goods) 90 105 7.00 90 105 10.50

Answer 1

Answer: 6; 9

Explanation:

The real exchange rate would be calculated as:

= (Nominal exchange rate × cost of basket in the United States) / cost of basket in China

a. Real exchange rate = (7.00 × 90) / 105

= 6

b. Real exchange rate = (10.50 × 90) / 105

= 9