The real exchange rate is the rate at which the currency of one country is traded for the currency of another country.

Provide a brief explanation and an example. Answer: The real exchange rate is the rate at which goods and services from one country can be exchanged for goods and services from another country, considering the purchasing power of each currency. It differs from the nominal exchange rate, which only represents the rate at which one country's currency can be exchanged for another country's currency. The real exchange rate takes into account inflation in each country. For example, if the nominal exchange rate between Country A and Country B is 1 A currency = 2 B currency, and the price of a product in Country A is 5 A currency and the same product in Country B is 10 B currency, the real exchange rate would be: Real Exchange Rate = (Nominal Exchange Rate x Domestic Price) / Foreign Price Real Exchange Rate = (2 x 5) / 10 = 10 / 10 = 1 In this example, the real exchange rate of 1 indicates that the product costs the same in both countries when considering the nominal exchange rate and relative prices.