Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan.

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Solution

Given = P = Price Level in India = 1.2

$P_{1}$ = Price Level in Japan = 3

e = Nominal Exchange Rate = $\frac{1}{1.25}$ = 0.8

$∴$ Real Exchange Rate = $\frac{e P_{1}}{P} = \frac{0.8 \times 3}{1.2} = 2$

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Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan.

Given = P = Price Level in India = 1.2 P1 = Price Level in Japan = 3 e = Nominal Exchange Rate = 11.25 = 0.8 ∴ Real Exchange Rate = eP1P=0.8×31.2=2

Given = P = Price Level in India = 1.2

$P_{1}$ = Price Level in Japan = 3

e = Nominal Exchange Rate = $\frac{1}{1.25}$ = 0.8

$∴$ Real Exchange Rate = $\frac{e P_{1}}{P} = \frac{0.8 \times 3}{1.2} = 2$