Calculation of the Real Exchange Rate

Trade Weighted Real Exchange Rate --- Methodology For the purpose of calculating the trade weighted real exchange rate series for the years 1982 to 1995 the following definition of PER is used: PER = price of tradeables Price of non-tradeables or PER = E x Pt Pn Instead of simply taking the WPI as a measure of the price of tradeable goods and CPI as a measure of nontraded goods, the whole system to calculate their appropriate proxies is worked through. Price of nontradeables --- domestic price level (Pn) The definition of expenditure on GDP, used in the Economic Survey of Pakistan includes private consumption (C), general government current consumption expenditure (G), gross domestic fixed capital formation and changes in stock (I), export of goods and non-factor services (X), less imports of goods and non-factor services (M). In symbols this can be written as: GDP = C + I + G + X – M To find the domestic expenditure on non-traded goods, exports (X) from the above equation are subtracted, which becomes domestic expenditure on non-traded goods: GDP – X = C + I + G + X – M – X or Yn = GDP – X 74 The Lahore Journal of Economics, Vol.2, No.1 The ratio of domestic expenditure on non-traded goods (Yn) at current prices to the domestic expenditure on non-traded goods at constant prices can be used as a proxy to measure the domestic price level (Pn) or the price of non-tradeables. Pn = Yn at current prices Yn at constant prices where; Yn = expenditure on GDP – exports Pn = domestic price level