What's the meaning of Nominal and Real Exchange Rate?

Nominal exchange rate refers to the rate at which one currency can be exchanged for another currency. It is the actual rate that is quoted in the market and is often expressed as the value of one currency in terms of another.

Real exchange rate, on the other hand, takes into account the effect of inflation on the exchange rate. It is the rate at which the purchasing power of one currency can be exchanged for the purchasing power of another currency. This means that the real exchange rate adjusts for the differences in the inflation rates between two countries.

In other words, the nominal exchange rate reflects the relative value of two currencies, while the real exchange rate reflects the relative purchasing power of the two currencies.