1) The real exchange rate

a) What is the difference between the real exchange rate and the nominal exchange rate?

b) What is the difference between the Law of One Price and Purchasing Power Parity?

c) Suppose a basket of goods in Thailand costs 1200 baht, while the same basket of goods in the US costs $26. If the exchange rate between the Thai baht and the US dollar is $1= 50 baht:

1) How many baskets of goods can you buy in Thailand with one basket in the US?

2) Calculate the exchange rate necessary for the Law of One Price (LOP) to hold.

3) Suppose the exchange rate changes to $1= 55 baht, how many baskets of goods can you buy in Thailand with the same basket of goods in the US? What is the effect on US net exports? Explain.