Question

Suppose that an Apple iPhone costs

​$180

in the United​ States,

​£70

in the United​ Kingdom, and

​¥35,000

in Japan.

If the exchange rate between the pound and the dollar is

​$1.80= £1, the real exchange rate between the pound and the dollar is

________.

​(Enter

your response rounded to two

places​.)

If the exchange rate between the dollar and the yen is

yen¥140=$1

, the real exchange rate between the dollar and the yen is

_____.

​(Enter

your response rounded to two

places​.)

Answer 1

Real Exchange rate(RER) = (Nominal exchange rate x Price of the foreign basket) / (Price of the domestic basket)

Pound and Dollar

Given,

exchange rate between the pound and the dollar is $1.80= £1

Price of the foreign basket=70£

Price of the domestic basket=180$

Using the formula above, RER=(1.8*70)/180=0.7

In the numerator, we are multiplying the dollar–pound exchange rate with a pound amount. Doing so changes the Pound so that it’s expressed in dollars. In the denominator we have the dollar price. Because now the price of both good(in US and UK) are expressed in dollars, we can compare them.

Dollar and Yen

Given,

the exchange rate between the dollar and the yen is ¥140=$1

Price of the foreign basket=180$

Price of the domestic basket=​35000¥

Using the formula above, RER=(140*180)/35000=0.72