Class 12 > Previous Year Questions

Question

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).
Medium

Solution

Given = P = Price Level in India = 1.2

P1 = Price Level in Japan = 3

e = Nominal Exchange Rate = 1/1.25 = 0.8

∴ Real Exchange Rate =
eP1/ P=(0.8 × 3) /1.2 = 2

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