Nominal Exchange rate Formula!!!!(Urgent) Amit sir/duck Plz help!!!!

Posted by Sumit on May 29, 2013; 1:22pm
URL: http://discussion-forum.276.s1.nabble.com/Nominal-Exchange-rate-Formula-Urgent-Amit-sir-duck-Plz-help-tp7581462.html

Hey Guys,
Help me in this there are two formula of Nominal exchange rate that I encounter while reading Mankiw And Dornbusch Fisher...plz tell me which one is correct..

Mankiw: Nominal exchange rate=real exchange rate*P^/P.....where P^=price of foreign goods and P=price of domestic goods..

Dornbusch Fisher: Nominal exchange rate=real exchange rate*P/P^.....where P^=price of foreign goods and P=price of domestic goods..


My Argument as follow:
Suppose we take Nominal exchange rate btw Rupee n Dollar...Say Rs.50/$..
Consider mankiw Formula:
Rs.50/$=Real exchange rate*P^/P..Also we are assuming Real exchange rate to be fixed...

Now, consider there is a depreciation of rupee or Appreciation of Dollar....Say Rs.55/$.

In the formula this depreciation of rupee means that price ratio(i.e P^/P) has increased (Note: we have assumed real exchange rate is fixed) which in other words means foreign goods become relatively more expensive than domestic goods....So, boz of this reason there is increase in net export.

Now, My argument is that in generally we know that the result of currency depreciation usually improves balance of trade( excluding J-curve condition)...Which we can also see in above case that the result of currency depreciation is to increase in net export...Is this means that Mankiw formula is right and dornbusch formula is wrong bocz as we take Dornbusch formula the depreciation of rupee means foreign goods become relatively more cheaper than domestic goods...which is opposite what we get in mankiw formula...????

Plz explain which one is right???