Real Exchange Rate

Posted in Finance, Accounting and Economics Terms, Total Reads: 858
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Definition: Real Exchange Rate

Real exchange rate is the exchange rate of a country with respect to another country when the exchange rate is adjusted for inflation.

Real exchange rate tells us how much is one country’s buying power in respect to the other country’s currency. If we consider the inflation also we get the true picture of the buying value. Formula for calculating Real exchange Rate is given below:

 

Real Exchange Rate = Nominal Exchange Rate X Domestic Inflation/Foreign Inflation

For example the nominal exchange rate between India and US is 50. India’s inflation is around 10% whereas US inflation is around 8 %. So the real exchange rate between India and US is

Real Exchange Rate         = 50 X 10/8

                                                = 62.5

So we see that due to difference in inflation the actual exchange rate is more.

Hence, this concludes the definition of Real Exchange Rate along with its overview.

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