Real exchange rate is regarded as an important economic issue, which interacts with the economy growth of a country. It relates to the nominal exchange rate and relative price both in home country and foreign country (Ellis, 2002). It is worthwhile to analyze how it is measured and how it is determined in the real economic circumstances. On the basis of some recent relevant researches, this paper will discuss three main features of real exchange rat, that is, the definition, the measurements and determinants.

By definition, real exchange rate refers to the price of foreign goods exchanged into a domestic currency relative to the price of domestic goods (Ellis, 2002). In order to calculate it simply, only two countries get involved into this definition, called bilateral rate. Therefore, real exchange rate can be expressed as ¡°the ratio of the price level in the home country to the price level in the foreign country¡± (Ellis, 2002,p1).

However, in the real world, usually there are more than two countries in the global businesses. Accordingly, there are more than two currencies that should be used to define the real exchange rate, called mu

Similarly, PEER model derived from BEER when BEER variables have permanent effect on the equilibrium exchange rate.

Different from NATREX approach, BEER focuses its external position when using economic fundamentals to determine the equilibrium exchange rate (Duval, 2002). Similarly, Maeso-Fernandez (2002) identified that ¡°BEER is based on the current levels of the fundamental factors, called ¡®current and cyclical equilibrium exchange rates¡¯¡±. In Maeso-Fernandez¡¯s research, the medium-term determinants of synthetic euro were analyzed against other 12 main partner countries, based on the BEER approach. According to empirical analysis, there are four crucial fundamentals, which will be shown in the following:

Where CA is the current account, I is investment and S is saving. According to this framework, three main models were developed to analyze the interaction of ERE and its different internal and external determinants, which reflect trade and capital flows. These models are the Natural Real Exchange Rate (NATREX: Stein 1994), the Behavioural Equilibrium Exchange Rate (BEER: Clark and MacDonald, 1998); the Fundamental Equilibrium Exchange Rate (FEER: Williamson, 1994). In the following, we will mainly discuss the first two models on the basis of analysis of two real currencies. Several other models will be discussed briefly afterwards.

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