Real Exchange Rate Calculator (Inflation Adjusted)
Current market rate (Domestic Currency per unit of Foreign Currency).
Annual inflation rate in your home country ($\pi$).
Annual inflation rate in the foreign country ($\pi^*$).
Calculated Real Exchange Rate:
0.00
function calculateRealExchangeRate() {
// Get Input Values
var nominalInput = document.getElementById('nominalRate').value;
var domInflationInput = document.getElementById('domesticInflation').value;
var forInflationInput = document.getElementById('foreignInflation').value;
// Parse Floats
var E = parseFloat(nominalInput); // Nominal Exchange Rate
var pi_d = parseFloat(domInflationInput); // Domestic Inflation
var pi_f = parseFloat(forInflationInput); // Foreign Inflation
// Validation
if (isNaN(E) || isNaN(pi_d) || isNaN(pi_f)) {
alert("Please enter valid numeric values for all fields.");
return;
}
// Logic: Real Exchange Rate (RER) = Nominal Rate * ( (1 + Foreign_Inflation) / (1 + Domestic_Inflation) )
// This formula calculates the effective real rate after adjusting for inflation differentials.
// It assumes the base period index was 1 for both, or simply adjusts the current nominal rate for one period of inflation.
var inflationFactor = (1 + (pi_f / 100)) / (1 + (pi_d / 100));
var realRate = E * inflationFactor;
// Percentage Change Calculation (Appreciation/Depreciation)
var pctChange = ((realRate – E) / E) * 100;
// Display Result
var resultDiv = document.getElementById('rer-result');
var valueDiv = document.getElementById('finalRealRate');
var interpDiv = document.getElementById('interpretation');
resultDiv.style.display = "block";
valueDiv.innerHTML = realRate.toFixed(4);
// Interpretation Logic
var changeText = "";
if (Math.abs(pctChange) 0) {
changeText = "The real exchange rate is higher than the nominal rate (" + pctChange.toFixed(2) + "%). This suggests the foreign currency has gained real purchasing power relative to the domestic currency due to inflation differentials.";
} else {
changeText = "The real exchange rate is lower than the nominal rate (" + pctChange.toFixed(2) + "%). This suggests the domestic currency has appreciated in real terms, making foreign goods relatively cheaper.";
}
interpDiv.innerHTML = "" + changeText + "Math Breakdown: " + E + " × (1 + " + (pi_f/100) + ") / (1 + " + (pi_d/100) + ")";
}
How to Calculate Real Exchange Rate with Inflation
The Real Exchange Rate (RER) is a crucial economic metric that adjusts the nominal exchange rate between two currencies to account for differences in price levels (inflation) between the countries. While the nominal exchange rate tells you how much foreign currency you can buy with your domestic currency at the bank, the real exchange rate tells you what that money can actually buy in terms of goods and services.
Why Adjust for Inflation?
Nominal exchange rates can be misleading over long periods. If Country A has high inflation and Country B has low inflation, the currency of Country A should logically depreciate to maintain parity. If it doesn't, Country A's goods become more expensive to foreigners, hurting exports. Calculating the RER allows economists and investors to see the "true" value of a currency, stripping away the noise of inflation.
The Formula
To calculate the Real Exchange Rate adjusted for inflation over a specific period, we use the inflation differential between the domestic and foreign economies. The formula used in the calculator above is:
RER = E × [ (1 + π*) / (1 + π) ]
Where:
RER: Real Exchange Rate
E: Nominal Exchange Rate (Domestic Price of Foreign Currency)
π* (Pi-star): Foreign Inflation Rate
π (Pi): Domestic Inflation Rate
Example Calculation
Let's assume you are in the United States (Domestic) looking at the Eurozone (Foreign).
Nominal Rate (E): 1.10 USD per EUR
Domestic Inflation (US): 5% (0.05)
Foreign Inflation (EU): 2% (0.02)
Using the formula:
RER = 1.10 × [ (1 + 0.02) / (1 + 0.05) ]
RER = 1.10 × [ 1.02 / 1.05 ]
RER = 1.10 × 0.9714
RER = 1.0685
Interpretation: Even though the nominal rate is 1.10, the high inflation in the US erodes the purchasing power of the dollar. In real terms, the exchange rate effectively drops to ~1.07. This means the competitiveness of US goods has changed relative to European goods.
Understanding the Results
If RER > Nominal Rate: Foreign goods are becoming more expensive in real terms (Domestic Depreciating).
If RER < Nominal Rate: Foreign goods are becoming cheaper in real terms (Domestic Appreciating).