The real exchange rate is understood as the ratio of the value of a certain standard basket of goods to the value of the same set of goods in the domestic economy. Moreover, both values must be expressed in a single currency. Despite the differences in approaches to determining the equilibrium real exchange rate, this indicator fairly accurately reflects the state of affairs in the state economy.
Instructions
Step 1
Use the formula to determine the real exchange rate: Q = (P 'x S) / P, where P' is the cost of the basic basket abroad in units of the corresponding currency; S is the foreign exchange rate; P is the cost of the basic basket of goods in the domestic economy; x is multiplication sign; / - division sign. Note that the real exchange rate here is expressed in a dimensionless value, therefore it is more informative than the nominal rate.
Step 2
Use a macroeconomic approach to determining the real exchange rate to eliminate the dependence of indicators on the volume of money supply in the country and the price level. The macroeconomic approach is based on a comprehensive assessment of changes in production technologies, demand and the global environment of the state.
Step 3
If data are available on capital flows from one country to another, use a balance of payments approach. Export-import flows are found in the foreign exchange market, which leads to the formation of the real exchange rate. Analyze the accumulation of foreign assets in the course of fluctuations in the nominal exchange rate.
Step 4
Calculate the real exchange rate using production profitability fluctuations in the tradable goods industries. The characteristics of production in this sector strongly influence the real exchange rate. High indicators indicate developing production, a low real exchange rate is typical for the most developed countries.
Step 5
Estimate the impact of the obtained indicator on the competitiveness of domestic goods. If the real exchange rate of foreign exchange is high and the domestic currency is weak, this leads to stimulation of the export of goods from the country. This situation also leads to a decrease in imports and a decrease in consumer welfare.
