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3
3. Computing real exchange rates
Consider a bundle of consumer goods that costs $90 in the United States. The same bundle of goods costs CNY 105 in China.
Holding constant the cost of the bundle in each country, compute the real exchange rates that would result from the two nominal exchange rates in the following table.
Cost of Bundle in U.S. Cost of Bundle in China (Dollars) (Yuan) 90 105 90 105
Nominal Exchange Rate Real Exchange Rate (Yuan per dollar) (Bundles of Chinese goods per bundle of U.S goods)
7.00
10.50
Expert Solution
Computation of Real Exchange Rate:
Real Exchange Rate = Nominal Exchange Rate * Domestic Price Index / Foreign Price Index
Here,
Domestic Country is US and China is foreign country.
For Case 1:
Real Exchange Rate = 7 * 90/105 = 6.00
For Case 2:
Real Exchange Rate = 10.50 * 90/105= 9.00
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