Calculate the real exchange rate

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Reference no: EM13893174

Oranges are the only good produced in the US and Spain. 1 ton of oranges cost $310 in the US, and 200 Euros in Spain. The nominal exchange rate is $1.55 per euro.

a. Calculate the real exchange rate (E) from the US's perspective. Intuitively, what does this number represent?

b. Now suppose that one ton of oranges costs 150 Euros in Spain, and everything is the same as above. Explain if, and how you can make a profit in this situation. What would you expect to happen to the price of oranges in the US and Spain if other people also followed your strategy? Assuming that transportation costs are zero, and that all goods are tradable, what does this imply about the real exchange rate, E?

Reference no: EM13893174

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