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:
“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)
“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)
“Great statesmen seem to direct and rule by a sort of power to put themselves in the place of the nation over which they are set, and may thus be said to possess the souls of poets at the same time they display the coarser sense and the more vulgar sagacity of practical men of business.”
—Woodrow Wilson (1856–1924)
“There is no legislation—I care not what it is—tariff, railroads, corporations, or of a general political character, that all equals in importance the putting of our banking and currency system on the sound basis proposed in the National Monetary Commission plan.”
—William Howard Taft (1857–1930)