The nominal exchange rate is 90 Pakistani rupees per dollar. The price of a shirt in Pakistan is 1800 rupees. The same shirt sells for $25 in the U.S. A. What is the real exchange rate? Show your work. B. Can arbitragers make a profit? C. If your answer to C is yes, where would they buy and where would they sell?
A. The real exchange rate = $25 x 90/ 1800 = 1.25.
B. Yes. The real exchange rate differs from 1.
C. Buy shirts in Pakistan and sell them in the U.S.
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