Real exchange rate dilemma!

[Arushi1]

What is the apt method to calculate RER?

Is it  i)EP*/P or ii)EP/P*

Fischer uses i)
While according to Krugman and Salvatore, its ii)

I used the former while solving 2012,DSE Q-57, I got a instead of c. So its quite apparent that such a miniscule deviation can lead to wrong answers.

Please let me know which one we should use!

Thanks :)

[Dreyfus]

Well that depends on how E is defined.

[Arushi1]

Could you elaborate? A small exmaple would suffice. Thanks :)

[Dreyfus]

Use this for ur reference. I hv assumed that US $ is home currency nd Pound sterling as foreign currency same as defined in dornbusch and if u use blanchard's terminology just interchange $ with £.

[Arushi1]

Legitimate! Thank you so much :)

[vandita24x7]

If home currency is Re. And foreign currency is $ and nominal ex. Rate is defined in per unit foreign currency term.. Then RER = (Re./$ * price in $)/ price in Re.

And if nominal ex. Rate is defined per unit home currency term then RER= ($/Re. *price in Re.)/ price in $

vandita

On 22 Jun 2014 19:08, "Arushi1 [via Discussion forum]" <[hidden email]> wrote:

Could you elaborate? A small exmaple would suffice. Thanks :)

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[Arushi1]

Thank you vandita :)