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In this website the formula for RER (at 1:02 of the video) is given differently,

Which one is true? or they mean different things?

The real exchange rate (RER);

RER = (Nominal exchange rate x Price of the foreign basket) / (Price of the domestic basket)

http://www.dummies.com/education/finance/international-finance/what-are-...

They are both true, and the formulas express the same idea.

But here is what it's confusing. The definition of the concept "exchange rate" in the MRU video is Foreign Currency over Domestic Currency. In the formula you provided, it is the other way around.

In the second formula, "Price of Foreign Basket" stands for what in the MRU video is called "Price Level in the Foreign Country". This raises no problems.

The formula as shown in the MRU video is:

RER=

(Foreign Currency over Domestic Currency) multiplied by (Domestic Price Level over Foreign Price Level).

Plugging in the numbers:

12/1 * 2/1 = 24

The RER is 24 to 1.

In the formula you provide, if we keep the definitions, the result is different:

RER=

(12/1 * 1) / (2) = 6.

This is unacceptable, which means the definitions used in this formula must be different. Indeed, in the formula you provided, the definition of the concept of exchange rate must be "Domestic Currency over Foreign Currency".

Plugging in:

(1/12 * 1) / (2) = 1 /24

The RER here is 1 to 24,

which refers to the same same thing as the formula in the MRU video, the only difference being how you express the exchange rate, namely whether you place the Foreign or the Domestic currency in the numerator.

At 1:02 , the formula relating real exchange rate with nominal exchange rate :: Does domestic prices mean US dollar ?

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