The nominal exchange rate is the price of a foreign currency expressed in local currency. The nominal exchange rate is the cost of acquiring one unit of foreign currency (say, a dollar) in terms of domestic currency (say, rupees). The exchange rate is expressed in terms of money, i.e. how many rupees per dollar. The nominal exchange rate, for example, is the price at which one American dollar can be purchased for 50 Indian rupees, or the price at which one dollar can be purchased for Rs.50. The real exchange rate is the price of imported goods relative to the price of domestic goods. Real exchange occurs when the cost of acquiring one unit of domestic currency (say, rupees) is expressed in terms of a foreign currency (say, dollar). For example, 1 rupee costs 2 cents (1 dollar=100 cents) in the example above. Visitors to America should be aware of how pricey American items are in comparison to those in their native country.
Here, P - Price level of domestic currency e- Nominal exchange rate and Pf is the Price level of the domestic currency. For example, if a watch costs 40 in the United States and the nominal exchange rate is 50 , it should cost Rs 2,000 with a real exchange rate of
epf=50x40=R=2000