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

Posted by Sumit on Jun 01, 2013; 1:59pm
URL: http://discussion-forum.276.s1.nabble.com/Nominal-Exchange-rate-Formula-Urgent-Amit-sir-duck-Plz-help-tp7581462p7581638.html

I think I got My answer all this discrepancy is only coz of Exchange rate which can be expressed in Two ways...

Consider NER=Nominal exchange rate, RER=real exchange rate, P=Domestic good price, P*=Foreign good price
 
Let Assume India=domestic country and US=foreign country.
Also Assume NER=Rs.50/$ which can be written as $0.02/Rs, P=Rs.200 & P*=$4

Now, First consider Mankiw formula Which Says RER=NER(P/P*).In this Formula Mankiw take NER=$0.02/Rs.So as we calculate RER{(0.02*200)/4} we will get RER=1...In other words, what mankiw is doing that he is calculating RER by following method RER=Domestic good price in terms of foreign currency/foreign good price in terms of foreign currency.

Now, Consider Dornbusch & Fishers Formula which says RER=NER(P*/P).In this formula Dornbusch & Fishers fisher take NER=Rs.50/$.So as we calculate RER{(50*4)/200} we will get RER=1 which is same as given by Mankiw formula....In other words, Dornbusch & Fishers try to calculate RER by following method RER=Foreign good price in terms of domestic currency/Domestic good price in terms of domestic currency.

Conclusion: Both the formula is correct n provide us a same RER but the difference in formula occurs due to method of calculating RER...Mankiw take the Domestic currency price in terms of foreign currency(i.e NER $0.02/Rs) whereas Dornbusch & Fishers take foreign currency price in terms of  Domestic currency(i.e NER=Rs.50/$)....

PS: Thank you so much Devika n Duck your inputs help me to solve this problem...also thanks duck for reminding me that RER is independent of units....

thanks Xiang for your link...appreciate it!!!...