In this study I scrutinized the role of traded and non-traded goods in the city real exchange rate changes in Pakistan. I employed the Engel (1999) methodology to decompose the city real exchange rate by Mean Square Error. In this study I considered 17 cities and computed 272 bilateral Pakistani cities real exchange rates, to find the proportion of traded and non traded goods variation to real exchange rate at all possible horizons that data allow. I analysed the role of consumption elasticity of substitution between traded and non traded goods. I verified that traded real exchange rate is stationary process in panel of 16 cities therefore by Im, Pesaran and Shin panel unit root test, which confirmed traded real exchange rate has a long run equilibrium. I used GARCH (1, 1) and EGARCH (1, 1) modelling for each city real exchange rate on two bases Karachi and Lahore. I found that variability in real exchange rate of each city is following GARCH (1, 1) EGARCH (1, 1) both or neither; if any city is following EGARCH (1, 1) modelling then variability is symmetric or asymmetric. This would be the first study which computed and analysed the city exchange rates in Pakistan as well as the traded and non traded indices. The author claimed that the city price dynamics and exchange rates in Pakistan will be an important contribution by this study Supervisor:- Dr. Hassan Muhammad Mohsin