What is the Real Exchange Ratio?

Do you want to measure the position of a country in international trade? Then you need the Real Exchange Ratio (RRI), since it allows to know what is the benefit obtained by a country from the sale of national products abroad compared to products that have been imported. In fact there are 2 fundamental data that we should know: the exports and imports. This is because by means of the Real Exchange Ratio we can know the quotient between the price of exports and that of imports of a country.

How the real terms of trade are calculated

To measure this common expression in the foreign trade we need to follow the following steps:

  • Step 1: Calculate the price index of exports made by a country at a specific time
  • Step 2: Calculate the price index of imports made by a country in the same period of time
  • Step 3: Divide the export price index by the import price index and multiply it by 100

The exact mathematical formula to measure the RRI would be: 100 x (Export Price Index / Import Price Index)

Based on the results obtained after calculating the Real Exchange Ratio, we can find 2 types of views about the country's position in international trade:

  • If the RRI is greater than 100: the real terms of trade has improved, since domestic products are sold at a higher price than products purchased from abroad.
  • If the RRI is less than 100: it means that the real terms of trade are worse compared to the rest since the price of domestic products sold is lower than that of products purchased abroad.

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