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I have a doubt: I'm studying about real exchange rates and I'm having some problem with the formula.

RER= NER* price ratio

What I don't understand is how do you take this price ratio? Which price appears in the numerator and which one in the denominator?

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Depends of which currency is in the nominator of the NER.

E.g. if you are calculating the real exchange rate between the US and the Eurozone $$ \text{RER} = 0.88 \frac{\text{EUR}}{\text{USD}} \frac{p_{\text{US}}}{p_{\text{EZ}}}. $$ Since $p_{\text{US}}$ is measured in USD, and $p_{\text{EZ}}$ is measured in EUR, this is the only way RER will make sense. If you calculated $$ 0.88 \frac{\text{EUR}}{\text{USD}} \frac{p_{\text{EZ}}}{p_{\text{US}}} $$ you would get something that is measured in EUR$^2/$USD$^2$, which would be very strange indeed.

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  • $\begingroup$ But even the first formula, what does this ratio actually imply? $\endgroup$ – user585380 Nov 26 '18 at 8:31
  • $\begingroup$ Please post new questions as new questions, not comments. $\endgroup$ – Giskard Nov 26 '18 at 11:49

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