Suppose the only good traded between Mexico, the U.S., and Brazil is beef, which is produced by all three countries. If the cost of producing a pound of beef is 5 pesos in Mexico, 2 dollars in the U.S., and 1 real in Brazil, the exchange rates based on the law of one price would be______ pesos per dollar and_____ dollars per real.

Question

Quizplus · Accepted Answer

The law of one price states that in the absence of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when prices are expressed in a common currency. If a pound of beef costs 5 pesos in Mexico and 2 dollars in the U.S., the exchange rate must be 2.5 pesos per dollar (5 pesos / 2 dollars) to equalize the prices. Similarly, if a pound of beef costs 2 dollars in the U.S. and 1 real in Brazil, the exchange rate must be 2 dollars per real to equalize the prices, as 1 real buys the same amount of beef as 2 dollars.

Suppose the Only Good Traded Between Mexico, the U