The relationship between inflation and exchange rate is very complicated, because there are facts that are inconsistent with theory and reality. First of all, talk about the negative correlation between inflation and exchange rate. According to the purchasing power parity theory, the currency of a country with high inflation level is bound to depreciate relative to that of a country with low inflation level. However, the purchasing power parity theory has two shortcomings. First, it assumes that goods can be traded freely, regardless of transaction costs such as tariffs, quotas and taxes. The second is that it only applies to goods, but ignores services, which may have a very obvious value gap. The negative correlation between inflation and exchange rate is mainly due to the relationship between real exchange rate and nominal exchange rate. Suppose there are two countries, country A and country B. The currency of country A is X, and the currency of country B is Y. The inflation level of country A is higher than that of country B. We assume that the inflation rate of country A is 20%/ year and that of country B is 0%/ year. At present, the exchange rate of X to Y is 1: 5. If there is a commodity M, in the first phase, the price of country A is 20 units of X, and the price of country B is 1 10 units of Y, then according to the nominal exchange rate, when M is imported from country A, as long as 100 units of Y is replaced by 20 units of X, the commodity M can be obtained at a lower price than that in China. With inflation, after 1 year, the price of commodity M in country A becomes 24 units of X, while the price in country B remains unchanged, which is still 1 10 units of Y. Suppose the exchange rate changes back to X: Y = 1: 5 in1. It is necessary to exchange 120 units of Y for 24 units of X, so that the price of imported M is higher than the domestic price, but on the other hand, it becomes profitable to import M from country A to country B, because only 22 units of X are needed. The following is the calculation method of real exchange rate: real exchange rate = nominal exchange rate * p/p, where p is the price level of foreign goods in foreign currency and p is the price level of domestic goods in local currency. In the above example, the actual exchange rate of X: Y in the first period is E * = 5 * 20/1/kloc-0 = 0.909, and that of X: Y in the second period is E * = 5 * 24/10 =/kloc-. When the inflation level of foreign countries is higher than that of their own countries, * p/p is greater than 1, and the real exchange rate of foreign currencies will rise, thus stimulating the export of domestic commodities and making the domestic currency appreciate. When the domestic inflation level is higher than that of foreign countries, * p/p is less than.