REAL EXCHANGE RATE

Subject: Economics

Concept:

Real Effective Exchange Rate – REER

The real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies.
The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index.
This exchange rate is used to determine an individual country’s currency value relative to the other major currencies in the index.
Countries with the largest trading relationships would typically have the largest weightings in this comparative index, while countries with small trading relationships would have smaller weightings in the basket of currencies.
REER is used to evaluate how a currency is fluctuating against many others at once, and is also used in international trade assessments.

NEER

The nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one country’s currency exchanges for a basket of multiple foreign currencies.
The nominal exchange rate is the amount of domestic currency needed to purchase foreign currency.
In economics, the NEER is an indicator of a country’s international competitiveness in terms of the foreign exchange (forex) market. Forex traders sometimes refer to the NEER as the trade-weighted currency index.
The NEER may be adjusted to compensate for the inflation rate of the home country relative to the inflation rate of its trading partners. The resulting figure is the real effective exchange rate (REER).