A bushel of apples costs $15.00 in the U.S. The same apples cost 1,600 yen in Japan. If the exchange rate is 80 yen per dollar, is there a possibility for arbitrage? Explain and defend your answer. As part of your defense, find the real exchange rate
There is a possibility for profit by buying apples in the U.S. and selling them in Japan.
The real exchange rate is 80 x 15/1,600 = 1,200/1,600 = 3/4.
The real exchange rate is less than 1 . This means apples are cheaper in the U.S.than in Japan.
A bushel of apples costs the equivalent of 1200 yen in the U.S., but costs 1,600 yen in Japan.
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