What is meant by foreign exchange rate? Distinguish between nominal exchange rate and real exchange rate.

Meaning of foreign exchange rate. The price of one currency in terms of another is known as foreign exchange rate. It is the rate at which one unit of a foreign currency is exchanged for domestic currency. In other words it is the price in domestic currency to obtain one unit of foreign currency. For example, if one unit of US dollar can be got by paying र 50, then foreign exchange rate is 1 $ = र 50 (or र 1 = 1/50 dollar = 2 cents). Foreign exchange rate is sometime called as external value of currency.
(i) Nominal exchange rate. It is price of foreign currency in terms of domestic currency. When cost (price) of purchasing one unit of foreign currency (say, dollar) is quoted in terms of domestic currency (say, rupees), it is called nominal exchange rate because exchange rate is quoted in money terms, i.e., so many rupees per dollar. For instance, if 1 American dollar can be obtained (exchanged) for 50 Indian rupees, i.e., if it costs rupees 50 to buy 1 dollar, it will be called nominal exchange rate. Generally, exchange rate is expressed in the form of nominal exchange rate, i.e., so many units of home currency are to be paid to get one unit of foreign currency.
(ii) Real exchange rate. It is relative price of foreign goods in terms of domestic goods. When cost of purchasing one unit of domestic currency (say, rupees) is quoted in terms of foreign currency (say, dollar), it is called real exchange rate. For instance, in the above case it costs 2 cents (1 dollar = 100 cents) to buy 1 rupee. People who plan to visit America need to know how expensive American goods are relative to goods at home. Real exchange rate is equal to Nominal exchange rate multiplied by foreign price level and divided by domestic price level. Symbolically: