Final answer:
The real exchange rate between two currencies, such as EUR and QAR, is the nominal rate adjusted for price levels in both countries, providing a measure of purchasing power. The nominal exchange rate is derived from the real exchange rate multiplied by the ratio of the price level in one country to the price level in the other.
Step-by-step explanation:
The real exchange rate between two countries, for example between the Euro (EUR) and the Qatari rial (QAR), is defined as the rate at which a given amount of a country's currency can be traded for a quantity of another country's currency, after adjusting for the difference in price levels between the two countries. This adjustment allows for a more accurate comparison of the purchasing power between the two currencies. Expressing the nominal exchange rate between the rial and the euro as a function of the price level in Qatar, the European Union, and the real exchange rate can be written as:
Nominal Exchange Rate (EUR/QAR) = Real Exchange Rate (EUR/QAR) × (Price Level in Qatar / Price Level in the EU)
The nominal exchange rate is influenced by various factors, including supply and demand in currency markets, and is subject to fluctuations over time. The real exchange rate, conversely, aims to reflect the relative costs of goods and services between the two countries, therefore providing a more stable and realistic measure of currency value