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)
“In our governments the real power lies in the majority of the community, and the invasion of private rights is chiefly to be apprehended, not from the acts of government contrary to the sense of the constituents, but from the acts in which government is the mere instrument of the majority.”
—James Madison (1751–1836)
“Money is the worst currency that ever grew among mankind. This sacks cities, this drives men from their homes, this teaches and corrupts the worthiest minds to turn base deeds.”
—Sophocles (497–406/5 B.C.)