Nominal exchange rates

The nominal foreign exchange rate is the price of one currency in terms of another currency; that is, the price of the domestic currency in terms of a foreign currency.

All exchange rates that you see quoted in the newspapers, on television or the Internet, or at travel agents, banks or airports, are nominal rates.

If a company trades overseas, it will buy or sell assets in foreign currencies. For example, an American company might buy materials from Canada, and pay for them in US dollars, and then sell its finished goods in Germany, receiving payment in Euros, or perhaps in some other currency.

Trade weighted exchange rate

A trade-weighted exchange rate is a measure, in index form, of the value of a currency against a basket of currencies. These are weighted according to the relative importance of the countries in the country’s trade.

Real effective exchange rate

A real effective exchange rate is a country’s exchange rate adjusted for changes in the domestic currency prices of its exports relative to the foreign currency prices of its imports.

If a country’s prices rise (fall) relative to those of its trading partners, its real exchange rate will rise (fall) relative to the nominal exchange rate