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.
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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)
“Science is Christian, not when it condemns itself to the letter of things, but when, in the infinitely little, it discovers as many mysteries and as much depth and power as in the infinitely great.”
—Edgar Quinet (1803–1875)
“One of the reforms to be carried out during the incoming administration is a change in our monetary and banking laws, so as to secure greater elasticity in the forms of currency available for trade and to prevent the limitations of law from operating to increase the embarrassment of a financial panic.”
—William Howard Taft (1857–1930)