# Real Exchange Rate

The **real exchange rate** measures the price of foreign goods relative to the price of domestic goods.

Mathematically, the real exchange rate is the ratio of a foreign price level and the domestic price level, multiplied by the nominal exchange rate.

Formally:

`R = (E.P*)/P`

Where:`R: real exchange rate`

E: nominal exchange rate

P*: foreign price level

P: domestic price level