Reference no: EM131848665

Effects of a Tariff

In Japan, there are tariffs, price supports, and import restrictions such quotas on rice. Compare the price of rice in Japan to the price in the United States by using the yen/dollar exchange rate to convert the prices to a common currency. Do you see the wedge in the prices that the theory predicts? (Later in the book, we will also predict a single price of goods when trade barriers are insignificant through a theory called purchasing power parity.) If in fact the prices of rice expressed in the same currency were the same, what would the yen/dollar exchange rate have to be?

Data:

• Price of 10kg rice in major Japanese cities: approximately 5250 yen (in 1997).
• Price of 10kg rice (of the same quality) in major U.S. cities: about 20 dollars (in 1997).

Japanese data are an average of major city price quotes in the Japan Statistical Yearbook 1999. U.S. price data are based on the author's observations. For exchange rate data and use a twelve-month average of the yen/dollar exchange rate.