Nominal and Real Exchange Rates_CFA考试视频

Or:the cost of one unit of the base currency in terms of the price currency.:USDEUR exchange rate of 1.2875,in terms of the domestic currency.

Nominal exchange rate refers to the value of one currency in terms of another currency. It is the rate at which one currency can be exchanged for another currency. For example, the nominal exchange rate between the US dollar and the euro is currently 1 USD = 0.85 EUR.

Real exchange rate, on the other hand, takes into account the inflation rate of the two countries. It is the rate at which the goods and services of one country can be exchanged for the goods and services of another country, after adjusting for the inflation rate. The real exchange rate is calculated by dividing the nominal exchange rate by the ratio of the price levels of the two countries.

For example, if the price level in the US is twice as high as the price level in the eurozone, then the real exchange rate between the US dollar and the euro would be 1 USD = 1.7 EUR. This means that the US dollar is overvalued by 15% compared to the euro, after adjusting for the difference in the price levels of the two countries.

In summary, the nominal exchange rate only takes into account the value of one currency in terms of another currency, while the real exchange rate takes into account the inflation rate and the difference in the price levels of the two countries.