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 - Economics

Sum

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).

Solution

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

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

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

Price of 1.25 yen = 1 rupee

Price of 1 yen =1/25=100/125 = 4/5

Therefore, e = 4/5

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

=4/5xx30/1.2

= 2

Therefore, the real exchange rate is 2.

Notes

First find out the nominal exchange rate as a price of yen in rupees.

Concept: Foreign Exchange Market - Determination of the Exchange Rate
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APPEARS IN

NCERT Class 12 Economics - Introductory Macroeconomics
Chapter 6 Open Economy Macroeconomics
Exercise | Q 4 | Page 101