Need help finding predicted exchange rate?
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Price of big mac in Indonesia = 14,600 rupiah
Actual exchange rate = 9,541 rupiah / US$
Price of big mac in USA = $3.06
Predicted exchange rate = ? rupiah / US$
The formula that i got from the textbook is:
Real exchange rate = Nominal exchange rate * Domestic price / Foreign Price
I am kind of confused. Is Nominal Exchange rate = Predicted exchange rate?
Need help finding predicted exchange rate?In the terminolgy given in the question, predicted exchange rate is for the real exchange rate. In the question the actual exchange rate has been given This is also called the nominal exchange rate.
So, your predicted exchange rate is the Real exchange rate
= Nominal exchange rate * Domestic price / Foreign Price
=9,541 * (14,600 / 3) =
you can calculate now.
But I suspect thereis some problem with your textbook formula. The purchasing power parity ratio is $3= rupiah 14600, or $1 is equivalent to rupia 4866.67.
Thus , Domestic price / Foreign Price = 4866.67 Multiplying this with the nominal exchange rate of 9,541 is a huge sum which cannot be said to be the real exchange rate!!!
I think you check the text book again. The formula should have been (though strictly still not accurate):
Real exchange rate = Nominal exchange rate *Foreign price / Domestic Price.
With my formula above, the real exchange rate =
9,541 * (3 /14,600) = close to 1.9
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