real exchange rate

Definitions (3)

1. The nominal exchange rate adjusted for inflation. Unlike most other real variables, this adjustment requires accounting for price levels in two currencies. The real exchange rate is: R = EP*/P where E is the nominal domestic-currency price of foreign currency, P is the domestic price level, and P* is the foreign price level.
2. The real price of foreign goods; i.e., the quantity of domestic goods needed to purchase a unit of foreign goods. Equals the reciprocal of the terms of trade.
3. The relative price of traded goods in terms of nontraded goods.

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