A bushel of rice costs 500 yen in Japan and 100 pesos in Mexico.If someone could sell a bushel of rice in Japan for yen, take those yen and exchange them for pesos, then buy a bushel of rice in Mexico, the nominal exchange rate would be___-__ and the real exchange rate would be_______ .

Question

Quizplus · Accepted Answer

The nominal exchange rate is calculated by comparing the cost of a bushel of rice in both countries: 500 yen in Japan and 100 pesos in Mexico, which gives 100 pesos / 500 yen = 0.2 pesos per yen, or its reciprocal, 5 pesos per yen. The real exchange rate is the rate at which goods in one country can be exchanged for goods in another. Since 1 bushel in Japan can be exchanged for 1 bushel in Mexico directly, the real exchange rate is 1:1 in terms of bushels, which translates to the same nominal rate of exchange for the currencies involved in purchasing a bushel of rice, thus 1 peso per yen when considering the value of goods directly.

A Bushel of Rice Costs 500 Yen in Japan and 100