REAL EFFECTIVE EXCHANGE RATE (REER)

REAL EFFECTIVE EXCHANGE RATE (REER) :
- The multilateral trade weighted real effective exchange rate (REER) is a weighted average of real exchange rate in respect of basket of countries with which the country trades; the real exchange rate is obtained by deflating the nominal exchange rates with the relative price differential between the domestic and foreign countries.
- Thus REER is the weighted average of NEER adjusted by the ratio of domestic price to foreign prices.
- It is one of the most commonly used indicators of international competitiveness.
- Since price differential between the trading countries is a factor determining exchange rate of the respective countries, price - adjusted measure (REER) is considered more effective for policy making REER is a way of measuring the price of foreign goods not just in currency - adjusted terms but also in price level adjusted terms.
- The Reserve Bank of India presently compiles and publishes six - country and 36 - country indices of NEER and REER.