UPSC- effective exchange rates types - economics

NEER and REER: Learn about Effective Exchang

Do you know the difference between the Nominal Effective Exchange Rate (NEER) and R
Exchange Rate (REER)? Read to know more about NEER and REER.

We all are familiar with exchange rates.

What is an exchange rate?

It is the rate at which one currency will be exchanged for another currency.

In this article, we shall learn more about exchange rates, particularly effective exchange


Effective Exchange Rate (EER)
Effective Exchange Rate (EER) is a summary indicator of movements of the home curren
of currencies of trading partners.

Effective exchange rates (EERs) serve as a gauge for assessing the fair value of a curren
competitiveness of an economy.

It also serves as a guidepost for setting monetary and financial conditions.

There are two types of EERs: Nominal effective exchange rate (NEER) and Real effective
(REER).


NEER
The Nominal Effective Exchange Rate (NEER) is an index of the weighted average of bila
of home currency with respect to a basket of currencies of trading partners.

It is also known as the trade-weighted currency index.

The important aspect of NEER is that it is not adjusted for inflation. Thus, it does not say
real strength of a currency; it is just a relative value.

However, it can be used to measure the relative strength of different currencies.



An increase in NEER indicates that the domestic currency has appreciated against the ba