Suppose the domestic price of a pair of boots is $139.99 and a similar pair of boots costs 10,695 Bangladeshi taka in Dhaka, Bangladesh. If the nominal exchange rate is 84.7 Bangladeshi taka per U.S. dollar, then what is the approximate real exchange rate?

Question

Quizplus · Accepted Answer

To calculate the approximate real exchange rate, we need to compare the prices of the boots in both countries in the same currency. We can convert the price in Bangladesh into U.S. dollars as follows:

10,695 Bangladeshi taka ÷ 84.7 Bangladeshi taka per U.S. dollar = $126.18

So, the price of the boots in Bangladesh is $126.18, which is lower than the domestic price of $139.99. Therefore, the U.S. dollar is overvalued relative to the Bangladeshi taka. To calculate the approximate real exchange rate, we divide the nominal exchange rate by the ratio of foreign to domestic prices:

84.7 Bangladeshi taka per U.S. dollar ÷ (126.18 ÷ 139.99) = 0.91

Therefore, the approximate real exchange rate is 0.91. Choice C is the correct answer.

Suppose the Domestic Price of a Pair of Boots Is