Purchasing Power of Currency
The "real exchange rate" (RER) is the purchasing power of a currency relative to another. It is based on the GDP deflator measurement of the price level in the domestic and foreign countries, which is arbitrarily set equal to 1 in a given base year. Therefore, the level of the RER is arbitrarily set depending on which year is chosen as the base year for the GDP deflator of two countries. The changes of the RER are instead informative on the evolution over time of the relative price of a unit of GDP in the foreign country in terms of GDP units of the domestic country. If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power parity (PPP) would hold for the GDP deflators of the two countries, and the RER would be constant and equal to one.
Read more about this topic: Exchange Rate
Famous quotes containing the words purchasing power, purchasing, power and/or currency:
“At present cats have more purchasing power and influence than the poor of this planet. Accidents of geography and colonial history should no longer determine who gets the fish.”
—Derek Wall (b. 1965)
“At present cats have more purchasing power and influence than the poor of this planet. Accidents of geography and colonial history should no longer determine who gets the fish.”
—Derek Wall (b. 1965)
“and men strive with each other not for power or the accumulation of paper
but in joy create for others the house, the poem, the game of
athletic beauty.
Then washed in the brightness of the vision,
I saw how in its radiance would grow and be nourished and suddenly
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the blood-red flower of revolution.”
—Dudley Randall (b. 1914)
“Common experience is the gold reserve which confers an exchange value on the currency which words are; without this reserve of shared experiences, all our pronouncements are cheques drawn on insufficient funds.”
—René Daumal (1908–1944)