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There is no doubt that the NEER is related to the currency exchange of the countries. This is mainly the amount of domestic currency which is necessary for the purchasing of the foreign currency. REER or real effective exchange rate is related to NEER and defined as the external competitiveness. REER is related to the value of currency and divided by the price or index of costs which is to be explained ahead.
NEER and REER
The full form of NEER is the Nominal-Effective-Exchange-Rate. It can be stated that the NEER is considered as the weighted means of average which is geometric in nature and related to the bilateral nominal exchange rate of the home currency to be in terms of other currency of the other countries. There is a significance of NEER such as this term of economics that can try to identify the store values of currencies more or less effectively. The other importance of the NEER is that it can also try to define the strength or weakness of the currency of a particular country with the help of the comparison of the currencies of the other countries.
On the contrary, REER is the other essential for the economic condition of a particular country. The meaning of REER in real terms of effective-exchange-rate which can help to measure the value of the currency of one country against the other different countries. There is a process to measure REER in that as REER value >100 for the given year indicates that the value of the currency has been overvalued. On the other hand, if the REER value< 100 in the particular year, the value of the currency is undervalued.
There are some differences between NEER and REER. These differences are described below:
- The nominal-effective-exchange-rate can try to measure the nominal part of the currencies while the REER or the real-effective-exchange-rate can try to measure the price indices and their other trends.
- The other difference is the NEER can indicate the weighted mode of average which is basically geometric and on the other hand, the REER can be defined as the average of NEER which is adjusted by the ratio related to the domestic price.
Importance of NEER and REER in UPSC
It can be stated that NEER and REER is one of the important topics for the UPSC exam and it can help the students to understand the economics. In the context of the UPSC, there are some effective parts of NEER and REER. In economics, NEER or the nominal effective exchange rate can indicate the international competitiveness of a particular country. This type of competitiveness can be identified with the help of the comparison with the other countries. There is a particular formula which is important to calculate the NEER of a country.
On the other hand, REER is defined as the process which can weigh the average of the currency of a country. The weights are identified by the comparison of the relative trade balance and the currency of the country. REER or the real effective exchange rate also has a particular process to calculate the average.
Importance of NEER and REER
In the context of this particular discussion, NEER is the process which can reflect the trade of one country with the other countries. In the context of India, NEER is considered as the weighted box. After comparing the weight of the Indian currency, there is no doubt that the weight is greater than the other different countries with which India does more business.
REER is another important thing in India. It is related to the inflation of the country. The real effective exchange rate of India is 116.8 in the year 2021 which is compared with the rate of the previous month. The highest REER of India is 118.3 in the year 2017 and the lowest is 94.8 in the year 2009.
Conclusion
From the above discussion, it can be concluded that NEER and REER are the two main things of the economy of different countries which can try to identify the international business condition or the economic condition of the countries. In the context of India, portrayal has shown that the percentage of REER is four in the financial year 2021. The cash rate of the particular country is calculated by the REER and the percentage of cash rate is also four in the FY 2021.
