A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is

Question

Quizplus · Accepted Answer

To find the real exchange rate, we need to calculate the price of the latte in each country's currency and then adjust for the exchange rate.

In the US: $3.75
In China: 28 yuan

Using the nominal exchange rate, we can convert yuan to dollars:
28 yuan ÷ 6.75 yuan/dollar = $4.15

Therefore, the real exchange rate is:
$3.75 ÷ $4.15 = 0.904

If purchasing power parity held, the nominal exchange rate would be higher, meaning that $1 would be worth more in China and therefore the real exchange rate would be lower.

A Starbucks Grande Latte Costs $3