Chapter 7International Parity Conditions31The real effective exchange rate index for the U.S. dollar, $,REis found by multiplying the nominal effective exchange rate index, $,NEby the ratio of U.S. dollar costs, C$, over foreign currency costs, CFC, both in index form:$$$.RNFCCEEC=×7-4.Real Effective Exchange Rates: Japan and the United States. Exhibit 7.3 compares the real effective exchange rates for Japan and the United States. If the comparative real effective exchange rate was the main determinant, does Japan or the United States have a competitive advantage in exporting? Which of the two has an advantage in importing? Explain why.
7-5.Exchange Rate Pass-Through. Incomplete exchange rate pass-throughis one reason that a country’s real effective exchange rate can deviate for lengthy periods from its purchasing power equilibrium level of 100. What is meant by the term exchange rate pass-through?