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.