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.