Nov 12 note - What determines the value of the dollar.docx
What determines the value of the dollar? (Ch 12)
Nominal exchange rate – the rate at which you can exchange one currency for another
“e” – how much foreign currency you can purchase with $1 Canadian dollar
“e” goes up - $CAD appreciates (buys more foreign currency)
“e” goes down - $CAD depreciates (buys fewer foreign currency)
Real exchange rate – the rate at which you can exchange goods & services between
RER = nominal ER x domestic price / foreign price
= eP / P*
What is the unit of the real exchange rate?
- Which one is cheaper
- 2 bushel of Mexican wheat per bushel of US wheat
How are exchange rates determined?
Purchasing-power parity (PPP) – a unit of currenc