What is the real exchange rate equation

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1. Because it acts like a price, U.S. export demand is inversely related to the U.S. real exchange rate. U.S. import demand is inversely related to the real exchange rate of foreign trading partners, which would just be the inverse of the U. S. real exchange rate for those two countries. A nominal variable like nominal GDP is converted to real GDP by dividing by the CPI (average price level (P) in the U.S.). Nominal bilateral exchange rates are converted to real exchange rates in the same way. Because one currency can be expressed in terms of another, dividing by the price level that corresponds to that currency involves cross-multiplication by the inverse of the price levels between the two trading countries. For example, if S = yen/1 dollar, then S x (the U.S. price level / price level in Japan) = the real exchange rate of yen per dollar.

a. What is the real exchange rate equation for S = dollars per yen?

b. If the percentage change is computed as the (change in a value/original value) x 100 = [(value now - value previous)/(value previous) x100] and the real exchange rate between the yen and the dollar is 105 today, but was only 100 last month, what is the percentage change in the real exchange rate?

Reference no: EM13888650

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