Question: Suppose that two countries, Vietnam and Côte d'Ivoire, produce coffee. The currency unit used in Vietnam is the dong (VND). Côte d'Ivoire is a member of Communauté Financière Africaine (CFA), a currency union of West African countries that use the CFA franc (XOF). In Vietnam, coffee sells for 5,000 dong (VND) per pound. The exchange rate is 30 VND per 1 CFA franc, EVND/XOF = 30.
a. If the law of one price holds, what is the price of coffee in Côte d'Ivoire, measured in CFA francs?
b. Assume the price of coffee in Côte d'Ivoire is actually 160 CFA francs per pound of coffee. Compute the relative price of coffee in Côte d'Ivoire versus Vietnam. Where will coffee traders buy coffee? Where will they sell coffee in this case? How will these transactions affect the price of coffee in Vietnam? In Côte d'Ivoire?