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?