What is the real exchange rate?
The RER between two currencies is the product of the nominal exchange rate (the dollar cost of a euro, for example) and the ratio of prices between the two countries. The core equation is RER=eP*/P, where, in our example, e is the nominal dollar-euro exchange rate, P* is the average price of a good in the euro area, and P is the average price of the good in the United States.
In the Big Mac example, e = 1.36. If the German price is 2.5 euros and the U.S. price is $3.40, then (1.36) x (2.5) ÷ 3.40 yields an RER of 1. But if the German price were 3 euros and the U.S. price $3.40, then the RER would be 1.36 x 3 ÷ 3.40 = 1.2.
Read this link ===> Back to Basics - Why Real Exchange Rates? - Finance & Development - September 2007
Hope it helps look at REER as well.
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