Define real exchange rate as the relative price of houses

Reference no: EM132201143

Question: Suppose that houses are made of aluminum and bricks. Assume that in each country the price of a house is equal to its cost of production (average of the price of bricks and aluminum). Assume aluminum is tradable and bricks are not. Defne the real exchange rate as the relative price of houses in Europe versus Canada. Suppose the real exchange rate increases, and the price of bricks relative to aluminum does not change in Europe. According to the Balassa-Samuelson theory, will the price of houses in Canada rise or fall relative to the price of houses in Europe? What do you think the relative price of bricks relative to aluminum in Canada?

Reference no: EM132201143

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