What is the real exchange rate from the perspective of the United States and Guatemala based on the prices of coffee in each country? Which country's coffee is more competitively priced?
The price of coffee grown in Guatemala is 24 Guatemalan quetzal (GTQ) per pound, while the price of comparable coffee grown in the U.S. is $3.50 per pound. Given that one Guatemalan quetzal trades for $0.12 in the foreign exchange market, we can calculate the real exchange rate from both perspectives.
From a U.S. perspective:
1 GTQ = $0.12
So, 24 GTQ = 24 * 0.12 = $2.88
From a Guatemala perspective:
1 USD = 8.33 GTQ
So, $3.50 = 3.50 * 8.33 = 29.16 GTQ
Therefore, Guatemalan coffee is more competitively priced than American coffee in the United States as $2.88 is lower than $3.50. Conversely, American coffee is more expensive in Guatemala as 29.16 GTQ is higher than 24 GTQ. Thus, Guatemalan coffee is more competitively priced than American coffee in the Guatemalan market.
Understanding Exchange Rates:
The exchange rate is the rate at which one currency can be exchanged for another. In this case, we are comparing the value of the Guatemalan quetzal (GTQ) to the US dollar (USD) to determine the real exchange rate between the two countries.
Calculating the Real Exchange Rate:
To calculate the real exchange rate, we need to consider the prices of coffee in Guatemala and the U.S. along with the exchange rate between the Guatemalan quetzal and the US dollar.
From the U.S. perspective, we convert the price of Guatemalan coffee from GTQ to USD using the exchange rate of 0.12. This gives us a price of $2.88 per pound of coffee, making Guatemalan coffee more competitively priced in the U.S. market.
From the Guatemala perspective, we convert the price of U.S. coffee from USD to GTQ using the exchange rate of 8.33. This results in a price of 29.16 GTQ per pound of coffee, making American coffee more expensive in the Guatemalan market.
Conclusion:
Based on the real exchange rate calculations, Guatemalan coffee is more competitively priced than American coffee in both the U.S. and Guatemalan markets. This demonstrates the importance of considering exchange rates when comparing prices across different countries. Consumers and businesses can make informed decisions by understanding the impact of exchange rates on the cost of goods and services.