Suppose Ron went to Rio de Janeiro in 2019 when the dollar was worth 4 reals. The price of a cup of coffee at Starbucks in the US was $4, so when Ron converted $4 into reals he had 16 reals, which was roughly what a cup of coffee cost in Rio.

When Ron went to Rio in 2021, the dollar was worth 5 reals. Because that's a 25% appreciation of the dollar, Ron figured he might have enough reals to buy a cup of coffee in Rio plus a donut. But after converting $4 into 20 reals, he only had enough to buy a cup of coffee and no donut. What happened? In other words, even though the dollar bought 25% more reals, why didn't it buy more goods in Rio?

1. The Economist magazine shows the following data for June of this year:

• The price of a Big Mac in the U.S. was $5.58.
• The price of Big Mac in Brazil was 22.9 reals.
• The nominal exchange rate was 4.85 reals per dollar.

How many dollars would an American need to convert into reals in order to buy a Big Mac in Brazil?

Where are Big Macs cheaper?

2. US
4. Brazil

Assuming Big Macs in the US are representative of many goods and services made in the US and Big Macs in Brazil are likewise representative of many goods and services made in Brazil, what do these prices and the exchange rate encourage?

2. U.S. exports to Brazil to rise, and U.S. imports from Brazil to fall.
4. U.S. exports to Brazil to fall, and U.S. imports from Brazil to rise.

Answer rating: 100% (QA)

The Economist is a wellestablished British publication known for its cov... View the full answer