Five key differences between Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER):
- Definition: NEER is the weighted average of exchange rates between a country’s currency and the currencies of its trading partners, with each currency weighted by its share of trade. REER, on the other hand, is an inflation-adjusted version of NEER that takes into account the relative prices of goods and services between countries.
- Calculation: NEER is calculated by taking the weighted average of exchange rates, while REER is calculated by adjusting NEER for inflation using a price index.
- Purpose: NEER is used to measure the overall strength of a country’s currency, while REER is used to assess the competitiveness of a country’s exports and imports.
- Impact of inflation: NEER does not account for changes in inflation rates, which can distort its measurement of a country’s currency strength. REER, on the other hand, adjusts for differences in inflation rates between countries, providing a more accurate picture of a country’s competitiveness.
- Usefulness: NEER is useful for short-term analysis of a country’s currency movements, while REER is useful for long-term analysis of a country’s competitiveness and trade balance. REER provides a more comprehensive view of a country’s economic performance by taking into account the impact of inflation on trade.