Question

Distinguish between the nominal exchange rate and the real exchange rate.

Answer 1

Feature	Nominal Exchange Rate	Real Exchange Rate
Definition	Price of one currency in terms of another currency.	Relative price of goods and services between two countries.
Unit of Measure	Units of foreign currency per unit of domestic currency.	Units of foreign goods per unit of domestic goods.
Market Driver	Determined directly by foreign exchange (FX) supply and demand.	Calculated using the nominal rate and relative inflation/price levels.
Inflation Impact	Does not account for changes in purchasing power or inflation.	Adjusted for changes in price levels (CPI) of both nations.
Economic Use	Used for day-to-day money conversion and international trade settlement.	Used to measure a country's actual international trade competitiveness.
Formula	Expressed directly (e.g., 1 USD = 0.92 EUR).	Real = `("Nominal" xx "Domestic Price Level")/"Foreign Price Level"`