If a bushel of wheat costs $3.20 in the US and costs 40 pesos in Mexico and the nominal exchange rate is 10 pesos per dollar, then the real exchange from the US perspective is 0.80. The US will…

If a bushel of wheat costs $3.20 in the US and costs 40 pesos in Mexico and the nominal exchange rate is 10 pesos per dollar, then the real exchange from the US perspective is 0.80. The US will…

increase exports of wheat to Mexico.

Explanation:

As the US increases exports of wheat to Mexico, it will receive more income per bushel since a bushel of wheat costs more in Mexico than in the US.  While a bushel of wheat costs $3.20 in the US, it costs $4.00 per bushel in Mexico.  Exports of wheat to Mexico will yield income in excess of $0.80 per bushel.

The $0.80 excess is computed from the difference between the dollar cost in Mexico and the dollar cost in US. With the exchange rate of 10 pesos per dollar, 40 pesos will be equal to $4.00.  So, if it costs $3.20 in US and $4.00 in Mexico, the best option would be to export more to Mexico and reap in the extra $0.80 ($4.00 - $3.20) per bushel.

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