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  • Formula for the Real Exchange Rate

Alternative Formula for the Real Exchange Rate

The standard formula for the real exchange rate can be algebraically rearranged to express it as the nominal exchange rate divided by the price ratio. This alternative formulation is useful for analyzing the separate impacts of nominal currency movements and relative price changes. The relationship is given as: c=e×P∗P=eP/P∗c = \frac{e \times P^*}{P} = \frac{e}{P/P^*} This can also be stated in words as: Real exchange rate=Nominal exchange ratePrice ratio\text{Real exchange rate} = \frac{\text{Nominal exchange rate}}{\text{Price ratio}} where the price ratio is the domestic price level (PP) relative to the foreign price level (P∗P^*).

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