Purchasing Power of Currency
The "real exchange rate" (RER) is the purchasing power of a currency relative to another. It is based on the GDP deflator measurement of the price level in the domestic and foreign countries, which is arbitrarily set equal to 1 in a given base year. Therefore, the level of the RER is arbitrarily set depending on which year is chosen as the base year for the GDP deflator of two countries. The changes of the RER are instead informative on the evolution over time of the relative price of a unit of GDP in the foreign country in terms of GDP units of the domestic country. If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power parity (PPP) would hold for the GDP deflators of the two countries, and the RER would be constant and equal to one.
Read more about this topic: Exchange Rate
Famous quotes containing the words purchasing power, purchasing, power and/or currency:
“Purchasing power is a license to purchase power.”
—Raoul Vaneigem (b. 1934)
“At present cats have more purchasing power and influence than the poor of this planet. Accidents of geography and colonial history should no longer determine who gets the fish.”
—Derek Wall (b. 1965)
“Knowledge will forever govern ignorance: And a people who mean to be their own Governors, must arm themselves with the power which knowledge gives.”
—James Madison (1751–1836)
“Both of us felt more anxiety about the South—about the colored people especially—than about anything else sinister in the result. My hope of a sound currency will somehow be realized; civil service reform will be delayed; but the great injury is in the South. There the Amendments will be nullified, disorder will continue, prosperity to both whites and colored people will be pushed off for years.”
—Rutherford Birchard Hayes (1822–1893)