4.1.8 Exchange rates

• how is nominal exchange rates measured?

  unadjusted or direct comparison to the value of their currencies
• how is a real exchange rate measured?

  nominal rate adjusted to take price levels into account
• what's a disadvantage of nominal exchange rates?

  don't select the true worth of currencies e.g how much you can actually buy
• how do real exchange rates overcome the true worth problem of nominal?

  take prices in the different countries into account using a price index e.g CPI for each county
• how's bilateral e.r measured?

  comparison of two currencies- nominal bilateral E.R directly compare the US dollar and pound
• what's an effective E.R?

  country's currency compared to basket of currencies- weighted average e.g proportion of the country's trade with each partner determines size of the weighting
• what's the aim of an effective E.R?

  gives a summary of the overall value of a currency compared to several others