National Exchange Rate and Real Exchange Rate
National Exchange Rate:
National exchange rate refers to the value of one country's currency in terms of another country's currency. It represents the ratio at which one currency can be exchanged for another. This rate is determined by various factors such as supply and demand for the currencies, interest rates, inflation, and political stability.
Real Exchange Rate:
The real exchange rate takes into account the relative prices of goods and services between two countries. It is the nominal exchange rate adjusted for differences in price levels between the two countries. The real exchange rate indicates how much of a country's goods and services can be exchanged for those of another country after adjusting for differences in purchasing power.
Factors affecting the National and Real Exchange Rates:
1. Inflation: Higher inflation in one country relative to another will lead to a depreciation of the national currency and a decrease in the real exchange rate.
2. Interest Rates: Higher interest rates in a country attract foreign investment, leading to an appreciation of the national currency and an increase in the real exchange rate.
3. Economic Indicators: Factors such as GDP growth, trade balance, and political stability can influence both the national and real exchange rates.
4. Speculation: Market speculation can also impact exchange rates as traders anticipate future movements in currency values.
In conclusion, the national exchange rate represents the value of a currency in comparison to another, while the real exchange rate considers price levels between countries. Both rates are influenced by various economic factors and play a crucial role in international trade and financial markets.