Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.
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Nominal Exchange Rate: It means the price of foreign currency in terms of domestic currency. Means, the number of units of domestic currency one must give up to get an unit of foreign currency.
Real Exchange Rate: It refers to the relative price of foreign goods in terms of domestic goods.
To buy domestic goods of foreign goods, at a point of time nominal exchange rate is more relevant.
Real Exchange Rate: It refers to the relative price of foreign goods in terms of domestic goods.
To buy domestic goods of foreign goods, at a point of time nominal exchange rate is more relevant.
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