Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan

1.	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). (Hint: First find out the nominal exchange rate as a price of yen in rupees).
Answer» Price level in foreign country: (Japan) P_f = 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 = 1/1.25 = 100/125 = 4/5 rupee Therefore, e = 4/5 So, real exchange rate = e(P_f/P) = 4/5 x 3/1.2 = 2 Therefore, the real exchange rate is 2.

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). (Hint: First find out the nominal exchange rate as a price of yen in rupees).

Answer»

Price level in foreign country: (Japan) P_f = 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 = 1/1.25 = 100/125 = 4/5 rupee
Therefore, e = 4/5
So, real exchange rate = e(P_f/P)
= 4/5 x 3/1.2
= 2
Therefore, the real exchange rate is 2.

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