REER and NEER.

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Presentation transcript:

REER and NEER

Starter What is it?

REER Real Effective Exchange Rate (REER) – the inflation adjusted exchange rate of one currency against a basket of currencies, weighted according to trade with each country

NEER Nominal Effective Exchange Rate (NEER) – the exchange rate of one currency against a basket of currencies, weighted according to trade with each country (not adjusted for inflation)

Task Explain the difference between the NEER and the REER (4) Explain the difference between ‘internal devaluation’ and ‘external devaluation’ (4)

Explain this… Unlike Latvia, Iceland has a floating exchange rate. Iceland’s nominal effective exchange rate (NEER) index depreciated by almost 50% after the end of 2007. In comparison, Latvia’s NEER was broadly unchanged (see Fig. 4.2). Latvia was more dependent on a change in its real effective exchange rate (REER), which depreciated by around 20% measured in terms of unit labour costs. This compares to a 45% depreciation in Iceland’s REER based on changes in unit labour costs.

Plenary What are they?