Nominal Exchange Rate

Published Jan 8, 2023

Definition of Nominal Exchange Rate

The nominal exchange rate is the rate at which one currency can be exchanged for another. That means it is the price of one currency in terms of another currency. Thus, it is usually expressed as the number of units of one currency that can be exchanged for one unit of another currency.

Example

To illustrate this, let’s look at the exchange rate between the US Dollar (USD) and the Euro (EUR). In January 2023, the nominal exchange rate between the two currencies is USD 1.00 = EUR 0.94. That means one US Dollar can be exchanged for 0.94 Euros (i.e., you’ll get 0.94 EUR/USD). Similarly, if we flip the exchange rate, it is EUR 1.00 = USD 1.07. That means, one Euro can be exchanged for 1.07 USD (i.e., you’ll get 1.07 USD/EUR).

Why Nominal Exchange Rate Matters

The nominal exchange rate is an important indicator of the relative value of two currencies. It is used by governments, businesses, and individuals to make decisions about international trade and investments.

If the exchange rate between two currencies is favorable, then it may be more profitable for a business to buy goods from a foreign supplier or invest in a foreign country. On the other hand, if the exchange rate is unfavorable, then it may be more profitable to buy goods from a domestic supplier or invest in the domestic economy.

Thus, the exchange rate is an important factor in international trade and investments.