Economics
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Review exercise 2
“Real” exchange rate
This is when the nominal exchange rate is adjusted for the differences in inflation performance between different countries. The purchasing power parity (PPP) is a method used to compare the relative prices of products in different countries and to measure changes in prices.
In theory exchange rates should adjust over time to ensure that prices of particular goods are the same in every country. As indicted in table 1 of the tutorial the Australian dollar has been depreciating against the major world currencies since the dollar was floated in 1983. However the real exchange rate value has been steady over the last 30 years.
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