A market basket of goods and services costs $260 in the United States. Buying the same group of goods and services in Mexico would require $220 to be exchanged for pesos. What is the real exchange rate of the U.S. dollar in this situation?

Question

Quizplus · Accepted Answer

The real exchange rate is calculated by comparing the cost of the same basket of goods and services in two different countries, adjusting for the nominal exchange rate. In this case, the basket costs $260 in the U.S. and $220 in Mexico. The real exchange rate is found by dividing the cost in the foreign country (Mexico) by the cost in the domestic country (U.S.), which is $220/$260 = 0.846. To express this as the amount of foreign goods equivalent to one unit of domestic goods, you invert this, giving 1/0.846 = 1.18.

A Market Basket of Goods and Services Costs $260 in the United