Exchange Rates
Having examined the international flows of capital and goods and services, we now extend the analysis by considering the prices that apply to these transactions. The Exchange rates between two countries is the price at which residents of those countries trade with each other. In this section we first examine precisely what The exchange rate measures, and we than discuss how exchange rates are determined.
Nominal and real Exchange Rates
Economists distinguish between two exchange rates: the nominal exchange rate and the real exchange rate. Let’s discuss each in turn and see how they are related.
The Nominal and real Exchange Rate The nominal and exchange rate is the relative price of the currencies of two countries. For example, if the exchange rate between the U.S. dollar and the Japanese yen is 120 yen per dollar, than you can