Consider a basket of consumer goods that costs $90 in the United States. The same basket of goods costs CNY 105 in China.
Holding constant the cost of the basket in each country, compute the real exchange rates that would result from the two nominal exchange rates in the following table.
Cost of Basket in U.S (Dollars) Cost of Basket in China (Yuan) Nominal Exchange Rate (Yuan per dollar) Real Exchange Rate (Baskets of Chinese goods per basket of U.S goods)
90 105 7.00
90 105 10.50

Note: The table in the question is merged together. It is therefore sorted before answering the question. See the attached excel file for the sorted table.

The answer to the explanation to the answer is now provided as follows:

The real exchange rate (RER) between the the currencies of two counties can be described as the multiplication of the nominal exchange and the ratio of baskets of goods between these two countries.

RER can can therefore be calculated using the following formula:

RER = (e * P*) / P ................................. (1)

Where, from the question;

e = Nominal exchange rate or Yuan per dollar

P* = Cost of Basket in U.S (Dollars)

P = Cost of Basket in China (Yuan)

For the first row in the table:

e = Nominal exchange rate or Yuan per dollar = 7

P* = Cost of Basket in U.S (Dollars) = $90

P = Cost of Basket in China (Yuan) = 105

Substituting the values into equation (1), we have:

RER = (7 * 90) / 105

RER = 630 / 105

RER = 6

For the second row in the table:

e = Nominal exchange rate or Yuan per dollar = 10.50

P* = Cost of Basket in U.S (Dollars) = $90

P = Cost of Basket in China (Yuan) = 105

Substituting the values into equation (1), we have:

RER = (10.50 * 90) / 105

RER = 945 / 105

RER = 9

andromache andromache · Answer 2 · 2022-04-12T11:48:56+02:00

The real exchange rates that should lead from the two nominal exchange rates should be 6 and 9.

Calculation of the real exchange rate:

RER = (e * P*) / P ................................. (1)

Here,

e = Nominal exchange rate or Yuan per dollar

P* = Cost of Basket in U.S (Dollars)

P = Cost of Basket in China (Yuan)

So,

e = Nominal exchange rate or Yuan per dollar = 7

P* = Cost of Basket in U.S (Dollars) = $90

P = Cost of Basket in China (Yuan) = 105

Now

RER = (7 * 90) / 105

RER = 630 / 105

RER = 6

Now

e = Nominal exchange rate or Yuan per dollar = 10.50

P* = Cost of Basket in U.S (Dollars) = $90

P = Cost of Basket in China (Yuan) = 105

So,

RER = (10.50 * 90) / 105

RER = 945 / 105

RER = 9

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