If the nominal exchange rate is 2 UK pounds per 1 US dollar, and if the price of a Big Mac is $2 in the USA and £6 in the UK, then the real exchange rate is 2/3 British Big Mac per American Big Mac.

Question

Quizplus · Accepted Answer

The real exchange rate is calculated as the ratio of the price of a basket of goods in two different countries. In this case, the basket of goods is a Big Mac. To calculate the real exchange rate, we need to divide the price of a UK Big Mac by the price of a US Big Mac, multiplied by the exchange rate.

(£6 per Big Mac) / ($2 per Big Mac x 2 pounds per dollar) = 3/1

Therefore, the real exchange rate is 3 British Big Macs per US Big Mac, or 2/3 US Big Macs per British Big Mac.

If the Nominal Exchange Rate Is 2 UK Pounds Per