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Exercise 1. Consider the Chinese-US real exchange rate, defined as, e = SPCH pus ; where S is the nominal exchange rate (defined as dollars
Exercise 1. Consider the Chinese-US real exchange rate, defined as, e = SPCH pus ; where S is the nominal exchange rate (defined as dollars per yuan), and PUS and POP are the price indices in the US and China. Suppose, further, that China produces and exports manufacturing goods, and the US produces and exports information-technology services. Both countries consume both type of goods and services in equal proportions. Thus, their price indices Pc = (Pc,/).5(PC,M)0.5 where Par is the price of information-technology services in country c, and Pay is the price of manufacturing goods in country c. Suppose that in the last year the variation in the real exchange rate e was -5% and that all this variation was due to the imposition of a tariff by the US to the imports of Chinese manufacturing goods. Assume that, absent the tariff, the law of one price held for both goods. Compute the value of the tariff imposed by the US. Show your work
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