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coffee grown in Guatemala is priced at 22 Guatamalen quetaz per pound. comparable coffee grown in...

coffee grown in Guatemala is priced at 22 Guatamalen quetaz per pound. comparable coffee grown in the US is priced ar $3.40 ler pound. One Guatemalan quetzal trades for $0.12 in the foreign exchange market.

1. Real exchange rate from the perspective of the US is?
2. Real exchange rate from the perspective of Guatamala is?
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Answer #1

Real exchange rate=(nominal exchange rate*price of the foreign basket)/(the price of the domestic basket)

1) Real exchange rate from the perspective of US=($0.12*22GTQ)/$3.40

=0.7764

2) Real exchange rate from the perspective of Guatamala={(1/0.12)GTQ*$3.40}/22GTQ

=1.2879

note: The nominal exchange rate is the number of units of domestic currency that are needed to buy one unit of given foreign currency. Here in Guatamala, to buy $1 it needs (1/0.12) GTQ. So the nominal exchange rate of Guatamala is 1/0.12 GTQ.

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