Chapter 6 Part 1 - Foreign Exchange Rates

Class 12 NCERT
Macroeconomics

## What is Nominal Exchange Rate?

The nominal exchange rate is the price of one unit of foreign currency in terms of domestic currency

Example

Dollar Rate is 75/Dollar

It means one unit of foreign currency dollar is equal to 75 Rupees

## What is Real Exchange Rate?

It is relative price of foreign goods in terms of domestic goods

Real Exchange Rate = Normal Exchange Rate * Foreign Price/ Domestic Price   ## What is Purchasing Power Parity?

When Real Exchange Rate is equal to 1

it is called Purchasing Power parity

Example

Suppose a burger cost Rs 140 in India and 2 Dollar in USA

Exchange Rate is Rs 70/Dollar

Real Exchange Rate = Normal Exchange Rate * Foreign Price/ Domestic Price

= 70*2/140

= 140/140

= 1

### NCERT Questions

#### Question 3

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.

### Other Books

#### Question 1

In the following questions, select the correct answers:

How is Real exchange rate calculated?

1. Normal Exchange Rate * Domestic Price/ Foreign Price
2. Normal Exchange Rate * Foreign Price/ Foreign Price
3. Normal Exchange Rate * Foreign Price/ Domestic Price
4. Real Exchange Rate * Foreign Price/ Domestic Price

#### Question 2

1. When Real Exchange Rate is less than Nominal Exchange Rate it is called Purchasing Power parity.
2. When Real Exchange Rate is equal to 1 it is called Purchasing Power parity.
3. When Real Exchange Rate is greater than Nominal Exchange Rate it is called Purchasing Power parity.
4. None of the above 