1. 1a. What is the real exchange rate between Japan and US in terms of corn? e x P / P* 100 (yen per $) x $5 US bushel / 750 yen Japanese bushel =.67 …….. 67 what? Japanese bushels per US bushel 1b How much does 1 Japanese bushel cost in US $? Convert P* to P = P*/e 750 yen / 100 yen per $ $7.50

2. 100 (yen per $) x $5 US bushel / 750 yen Japanese bushel =.67 …….. 67 what? Japanese bushels per US bushel 1b 1 Japanese bushel costs $7.50 US 1c – where is corn more expensive Japan ……. Why? It takes $5 to buy a US bushel It takes $7.50 to buy a Japanese bushel

3. #2 P*/P = 1200/30 = 40 Won per Dollar

4. P*/P but now pair of jeans = 2400 won …..so 2400/30 = 80 won per dollar The Won depreciated because it now takes more Won to buy 1 US $

5. So jeans in Korea cost 2400 won and in the US cost $60 P*/P 2400 / 60 = 40 won per dollar The US dollar depreciated from part B.. Continue from part B and compare to part B --$1 did purchase 80 won, now it will only purchase 40 --$1 will buy less S.Korean won