Fig. 2: The Yen/Dollar Exchange Rate and Relative Japan-U.S. Price Levels, 1980–2006 Source: IMF, International Financial Statistics. Exchange rates and price levels are end-of-year data. U.S. dollar is appreciating against the yen even though the U.S. price level is rising relative to Japan’s.
The Real Exchange Rate Approach to Exchange Rates (cont.) Real exchange rate = Relative price of two output baskets = Dollar price of the EU basket relative to the American basket Nominal exchange rate = Relative price of two currencies = Dollar price of one euro Dollar price of a basket containing the typical weekly purchases by U.S. HH and firms. Euro price of a basket containing the typical weekly purchases by EU HH and firms.