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International Trade

Problems

Exchange Rates

Trade and the Country

Problem : How do we calculate the nominal exchange rate?

To calculate the nominal exchange rate, determine the amount of foreign currency that can be calculated for one unit of domestic currency.

Problem : How do we calculate the real exchange rate?

The equation follows: real exchange rate = (nominal exchange rate X domestic price) / (foreign price)

Problem : How do the nominal exchange rate and the real exchange rate differ?

The nominal exchange rate tells how much foreign currency can be purchased with a unit of domestic currency. The real exchange rate tells how many foreign goods can be purchased with domestic goods.

Problem : How do net exports relate to the real exchange rate?

As the real exchange rate increases, net exports fall as imports increase and exports fall.

Problem : If a country has a high real exchange rate, what does this tell you about the nominal exchange rate?

The real exchange rate tells nothing conclusive about the nominal exchange rate since both the nominal exchange rate and the price level affect the real exchange rate.

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