HPAS/Allied Mains 2022 Answer Writing Challenge Day 196: Model Answer

Question: What is the difference between REER and NEER? (4 marks/60 words)

Answer:

Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) are indicators of external competitiveness.

REER

• It reflects the inflation-adjusted value of the domestic currency as compared to other major currencies being traded.
• It nullifies the impact of inflation differential between various currencies and focuses on the exchange rate of differential alone.
• It is calculated on the basis of NEER.
• It is regarded as a more accurate measure as it is adjusted for inflation.

NEER.

• It reflects the relative value of the domestic currency as compared to other foreign currencies.
• It is impacted by the inflation differential between the country its trading partners.
• It is calculated against a basket of currencies.
• It can differ in providing accurate measurements due to inflation differential.