Exchange rate for traded good - "Law of One Price"
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Suppose that there are only two goods produced in the world: computers, which are traded internationally and ice cream which is not. The following table shows in two countries:
Computer Ice cream Price of Price of
Produced Per capita Produced Per capita Computers in Local Currency ice cream
Country
Richland 12 4 2 4
Poorland 3 1 1 1
B. Calculate the market exchange rate between the currencies of the two countries.
C. What is the ratio of GDP per capita in Rich land to GDP per Capita in poorland, using Market exchange rate?
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Solution Summary
The solution calculates market exchange rate between the currencies of the two countries and the ratio of GDP per capita in Rich land to GDP per Capita in poorland, using Market exchange rate.
Solution Preview
B. Calculate the market exchange rate between the currencies of the two countries.
Computers are traded internationally
Price in Richland's local currency= 2
Price in Poorland's Local ...
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