Question

)  The Japanese yen trades at 110 yen per dollar and the British pounds trade at 0.62 pounds per dollar. What is the nominal exchange rate between the yen and the pound?           

1. A Japanese-made computer costs 250 000 yen and a similar British-made computer costs £1500. Given the nominal exchange rate from part a), which computer is cheaper?                                                                                                                                             

From the perspective of the British find the real exchange rate in terms of computers. Based on the real exchange rate you found which country’s computers are more competitively priced?

Answer 1

Yen trades for 110 yen per dollar while British Pound trade for 0.62 pound per dollar which means 110 yen can be traded for 0.62 pound. Nominal exchange rate between Yen and Pound is 110 Yen = 0.62 Pound

1 British Pound = 177.41 Yen

a) Japanese computer cost = 250,000 yen

British computer cost = 1,500 pound

If 1,500 British Pound is converted into Yen, it will be 1,500 * 177.41 = 266,115 which is more than the price of Japanese computer which means Japanese computer is cheaper than British Computer.

Real Exchange rate is calculated as: Nominal Exchange Rate * (British Computer Price / Japanese Computer Price)

Real Exchange rate = 177.41 * (1,500 / 250,000) = 1.06

High real exchange rate of British computer means that Britain will import computers from Japanese which makes Japanese computers most competitive priced.