real exchange rate


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Real Exchange Rates

The purchasing power of two currencies relative to one another. While two currencies may have a certain exchange rate on the foreign exchange market, this does not mean that goods and services purchased with one currency cost the equivalent amounts in another currency. This is due to different inflation rates with different currencies. Real exchange rates are thus calculated as a nominal exchange rate adjusted for the different rates of inflation between the two currencies. See also: Purchasing power parity.

real exchange rate

the EXCHANGE RATE of a currency expressed in constant price terms to make allowance for the effects of INFLATION. For example, where a country experiences a higher rate of domestic inflation than its trade competitors, then its exports will become more expensive than those of competitors’ exports and its imports cheaper than domestic products, unless its exchange rate depreciates to offset fully the inflation differential. In situations where exchange rates are fixed by international agreement or determined by market forces that do not reflect relative inflation rates, then nominal exchange rates can differ significantly from real exchange rates. A country's real exchange rate is the more important measure of that country's INTERNATIONAL COMPETITIVENESS. See PURCHASING-POWER PARITY THEORY.
References in periodicals archive ?
All these forces pushed the real exchange rate down, and dragged the economy's current-account balance with it.
6) In cross-sectional 1990 data that includes poor and rich countries, he finds a strong relationship between relative GDP per capita and the real exchange rate.
The 6th equation shows that the effects the variables of government expenditures, real GDP, trade liberalization, real exchange rate on industrial workshop is positive and significant.
Indeed, such a structure opens up the possibility of the nonstationary real exchange rate.
Pinpointing this threshold productivity level using a zero-profit cutoff condition allows the entire model to be solved numerically without linearization and yields analytical results depicting the influence of shocks to a country's general technological state on the nominal and real exchange rate.
While Chinn (1998) examined the productivity based explanation for real exchange rate for East Asian countries by using three additional variables; oil prices, government spending and terms of trade.
Section III presents the relevant literature which is followed by a discussion of the theoretical framework and econometric methodology used in real exchange rate determination.
Proposition 2: Under purchasing power disparity, a flexible exchange rate system performs better only if output target is adjusted to its long-run equilibrium value and the real exchange rate is lower than its long-run value.
Real exchange rates and purchasing power parity: mean-reversion in economic thought, Applied Financial Economics 16(1/2): 1-17.
Although this can clearly simplify the analysis, such an approach essentially ignores the consequences of changes in the real exchange rate brought about by terms-of-trade shocks; however, it is clear that changes in both terms-of-trade and the real exchange rate play a crucial role in the behavior of firms and households.
We then investigate conditional volatility of EU countries' real effective exchange rates and assess whether EMU has played a role in reducing it, first by estimating GARCH equations for conditional real exchange rate volatility, and then by testing in a panel framework for determinants of changes in the level of conditional volatility over time, with a key focus on the sign, size and significance of an EMU dummy, while taking into account macroeconomic determinants.
The US refiners' acquisition cost of domestic and imported crude oil, the industrial production construction component, the (inverted) real exchange rate, and net insufficient inventories component decreased in December.

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