1. Define nominal, purchasing power parity (PPP), and real exchange rates.

Nominal Exchange Rate (NER): Price of one currency in terms of another currency.
Example: $1 = Rs. 70.
Purchasing Power Parity (PPP) Exchange Rate: Compares prices of the same basket of goods in different countries.
It shows how much of one currency is needed to buy what a unit of another currency buys.
Example: If a burger costs $1 in U S an d R s .35 in I n d ia, P P P i s$ 1 = Rs. 35.
Real Exchange Rate (RER): Measures trade competitiveness between countries.
Formula: RER = Nominal Exchange Rate / PPP Exchange Rate.
It indicates how much goods in one country cost compared to another, in common currency.

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