With respect to Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER), consider the following statements:
1. REER is essentially the inflation-adjusted version of NEER.
2. An increase in a nation's REER shows the reduction of trade competitiveness, while NEER shows if a currency is strong or weak.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Question

With respect to Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER), consider the following statements:
1. REER is essentially the inflation-adjusted version of NEER.
2. An increase in a nation's REER shows the reduction of trade competitiveness, while NEER shows if a currency is strong or weak.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

ONLiNE UPSC · Accepted Answer

Statement 1 is correct: Real Effective Exchange Rate (REER) is essentially the inflation-adjusted version of NEER. It accounts for differences in price levels (or inflation rates) between countries, giving a clearer picture of a country's competitiveness in the international market.

Statement 2 is correct: An increase in a nation's REER is an indication that its exports are becoming more expensive and its imports are becoming cheaper, reducing its trade competitiveness. The NEER is an abstract, relative value that does not measure the strength of a currency in real terms. NEER can only measure whether a currency is strong or weak or is strengthening or weakening relative to other foreign currencies.

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Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER)

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M Question 1	⏱ 0
With respect to Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER), consider the following statements: 1. REER is essentially the inflation-adjusted version of NEER. 2. An increase in a nation's REER shows the reduction of trade competitiveness, while NEER shows if a currency is strong or weak. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2