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(ECONOMICS) ratio between a country's foreign exchange rate and the real purchasing power of its local currency.

The actual exchange rate between (say) the yen and the US dollar tells you nothing about the relative strength of the two currencies. The US dollar buys 92.57 yen (17 May 2010) right now, which sounds like a lot. But $100, converted into ¥9,257, only buys $71 worth of actual goods & services. In order for the yen:dollar exchange rate to reflect real purchasing power of the two currencies, the US dollar should be able to buy ¥130.

The real exchange rate for the US dollar against the Japanese yen is 1.41 (meaning the yen is costlier than the dollar in real terms).
The recent (March-May) fall of the euro against the US dollar has brought the real exchange rate of the two currencies into approximate parity.
by Abu Yahya May 17, 2010
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