What Is The Difference Between Real And Nominal Exchange Rate?


2 Answers

Anonymous Profile
Anonymous answered
Nominal exchange rate:
The rate at which a person can trade the currency of one country for the currency of another

Real exchange rate:
The level of the exchange rate taking account of inflation differences.
A way of measuring the price of foreign goods not just in currency-adjusted terms but also in price-level adjusted terms. ...
Ken williams Profile
Ken williams answered
The real exchange rate is normally termed the interbank rate and is a number fixed at a certain time of day for banks trading between themselves which is often used around the world as the official rate.  In practice the nominal rate is the rate you get when trading one currency for another.  For instance, the current "Real" rate between the US Dollar and the Euro is:
1 USD = 0.767036 EUR and 1 EUR = 1.30372 USD.  But when making exchanges of currency the bank normally charges a fee for the transaction to pay for the processing and as a hedge against a rate change occurring before they can make a larger interbank exchange.  So right now if you were to exchange Dollars for Euros you might get 0.72 Euros per Dollar rather than the 0.767 Euro interbank (real) rate.  On the flip side of that is changing  your Euros for Dollars where you might get 1.25 Dollars for each Euro exchanged instead of the 1.30 interbank rate.  In many banks you can get a better exchange rate when converting larger amounts of money than when converting a smaller amount.  Often when traveling you can find other people willing to make a private trade of one currency for another at the real rate since it allows both parties to get more for their money than if they went to a bank or currency exchange.  However in some countries it is against the law to do a private money exchange.

Answer Question