1. B Y M I K E F L A D L I E N
Real Exchange Rate

2. The Basics
 A consumer can buy an
apple in the United
States
 The apple costs $2
 The exchange rate is $3
for 1€
 A consumer can buy an
apple in the Euro area
 The apple costs 2 Euros
 The exchange rate is 1€
for $3

3. What is the Real Exchange Rate?
Real exchange rate is the cost of domestic goods
relative to the cost of foreign
 If the consumer lives in the US and buys an
apple, she will spend $2
 If the consumer lives in the US and buys an apple
from the Euro area, then the apple will cost her $6
($3 = 1€ and the apple costs 2€)
 Thus the US consumer “gave up” 3 apples
 The real exchange rate is 3 to 1

4. Real Exchange Rate For The Euro Area
 When the consumer in the Euro area buys an apple
in the US, she gives up 1/3 of an apple
 Thus, economics predicts that since apples are
relatively cheaper in the US, consumers in Europe
will buy US apples

5. What is the Real Exchange Rate?

6. What Does the Data Suggest?
 At least, during the latest recession, the real
exchange rate became more favorable for US citizens
 In other words, they had to give up less in domestic
goods to purchase foreign goods
 Euro buyers of US goods had to give up more
European goods to buy US goods
 The trade balance should have moved to a positive
balance. Did it?

7. Real Net Exports

8. A Technical Definition
 This is from AmosWeb.com:
 EXCHANGE RATE:
 The price of the currency of one country stated in terms
of the currency of another country, that is, the rate of
exchange of one currency for another. Exchange rates,
also termed foreign exchange rates, are prices
determined in foreign exchange markets that are set up
to trade the currencies of different nations (foreign
exchange). In general, exchange rates reflect the overall
health, vitality, and productivity of a nation's economy.
However, because exchange rates also affect
international trade (exports and imports) among nations
they are often subject to governmental policy control.

9. Questions or Comments
 In my old age, I’m making mistakes. If you find an
error, I would like to know. Contact me at:
 mfladlien@gmail.com
 All of the best!