Question

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).

Answer 1

Answer:

Price level in foreign country: (Japan) Pf = 3

Price level in home country: (India) P = 1.2

Now, real exchange rate = e(Pf/P)

Price of 1.25 yen = 1 rupee

Price of 1 yen = 1/1.25 = 100/125 = 4/5 rupee

Therefore, e = 4/5

So, real exchange rate = e(Pf/P)

= 4/5 x 3/1.2

= 2 Therefore, the real exchange rate is 2.

Explanation:

hope it helps u

:)