Can anyone please tell me how this person did the calculation? How did he get the RER ?
Thank you
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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) Ă· 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 Ă· 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.
You may also find usefull…> Effective exchange rate indices
Simple…
here’s a spreadsheet i whipped up in 2mins
NOTE THE FORMULA
Oh nice, Thank you. I know where the ppp is coming from, but what is the “market value” is it the rate of “big mac” or the “exchange rate”. It was mentioned that the data is real from Feb 8, 2016. So if this is the exchange rate of that month, is it the candle close value or open what? This economics side is totally new for me.
I read the whole article but how does it take into account the PPP?
The PPP is the goods your using in your analysis
so PPP is the big mac
in real life it would be a Basket of things not just 1 thing.
it would be used for finding companies market value stocks shares bonds etc.
Forex is not so straight forward
Market Value is the price an asset would fetch in the marketplace.
Ok but maybe i am missing something… where are these values in 2nd column comjng from? Where can i find that.
Ask Martin as he posted the table.
But i heard that you only need know 3% of all the economic data just gota find out what it is
The PPP is the difference in whatever was used in the analyis Beer, Burgers and surf wax i guess.?.
i thought it was pretty self explanatory
the items in COLUMN A are obviously the instruments
the items in COLUMN B are the PPP (as per the OP’s supplied table)
the items in COLUMN C are the MARKET VALUE (as per the OP’s supplied table)
the items in COLUMN D are the PPP (as per the OP’s supplied table)
THE DIFFERENCE IS THE RER IN COLUMN D has formula applied to it
to show
- that the values are the same as the OP’s table
- to show the formula that is required to calculate the RER
Which is PPP Divided by MARKET VALUE (B3/C3)
as for the origin of the original data, that came from the OP
sorry yeah its 1am im tired.
you have the figures thecyberguy
you tell us where its come from lol
No probs,
all good, i get those 1am blonde moments from time to time, it’s understandable .