Principles of Economics- Mankiw (5th) 647

Principles of Economics- Mankiw (5th) 647 - CHAPTER 29...

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CHAPTER 29 OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 669 For any country, there are many nominal exchange rates. The U.S. dollar can be used to buy Japanese yen, British pounds, French francs, Mexican pesos, and so on. When economists study changes in the exchange rate, they often use indexes that average these many exchange rates. Just as the consumer price index turns the many prices in the economy into a single measure of the price level, an exchange rate index turns these many exchange rates into a single measure of the interna- tional value of the currency. So when economists talk about the dollar appreciating or depreciating, they often are referring to an exchange rate index that takes into account many individual exchange rates. REAL EXCHANGE RATES The real exchange rate is the rate at which a person can trade the goods and ser- vices of one country for the goods and services of another. For example, suppose that you go shopping and find that a case of German beer is twice as expensive as
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