# Calculate real - International Economics

Document Sample

```					              Sub: Economics                                                       Topic: International Economics

Question:
Calculate the real exchange rate - Show your work. Intuitively, what does
this number represent?

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Rice wine is the only good produced in Thailand and Taiwan. A bottle of wine costs 100 bhat in
Thailand and 200 NT in Taiwan. The nominal exchange rate is 0.5 bhat per NT. Calculate the real
exchange rate from Thailand’s perspective (i.e., using Thailand as the “domestic” economy).
Show your work. Intuitively, what does this number represent?

Solution:
The nominal exchange rate e is the price of domestic currency of one unit of a foreign currency.

The real exchange rate is defined as

RER= e ( P*/P) where P is the domestic price level and P* is the foreign price level.

Here e = 0.5
P*= 200
P= 100 (considering Thailand as a domestic economy)

RER= e( 200/100)= 0.5* 2= 1

** End of the Solution **

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