A measure of the nominal exchange rate that has been adjusted for inflation differentials since an arbitrarily defined base period.

The nominal exchange rate adjusted for inflation. Unlike most other real variables, this adjustment requires accounting for price levels in two currencies. The real exchange rate is: = EP*/P where is the nominal domestic-currency price of foreign currency, is the domestic price level, and is the foreign price level. The real price of foreign goods; i.e., the quantity of domestic goods needed to purchase a unit of foreign goods. Equals the reciprocal of the terms of trade. Equivalent to definition 1. The relative price of traded goods in terms of nontraded goods.

A measurement of the relative price of goods from different countries when measured in a common currency.