Neer vs reer, Microeconomics

NEER Vs REER:

In a situation where there are multiple trade partners, the effect of cross-currency movements are judged by nominal effective exchange rate (NEER) and real effective exchange rate (REER). The construction of export weighted NEER index is shown in the Table.

We make the following assumptions:

i) India's trading partners are the UK and the US

ii) Share of the US in India's trade = 70%

iii) Share of the UK in India's trade = 30%

The NEER index is the trade weighted average of the trade flows between India and the UK, and between India and the US. For example, for period 2 the NEER index is 100 × 0.3 + 90 × 0.7 = 93. With unchanging trade shares, when rupee-dollar nominal exchange rate falls by 10%, NEER falls by 7%(that is, 70% of 10%). When the Rupee- pound nominal exchange rate increases by 20%, then NEER increases by 6% (that is, 30% of 20%). Thus, the exchange rates of the major trading partners influence the movements of NEER.

When NEER is adjusted for the differences in relative prices between trading partners, the trade weighted REER is obtained. Table 18.3 presents the comparative NEER and REER indices of India for the period 1991-2003. We find that rupee has been strengthening against the currencies of major trading partners. A comparison with the REER shows that the except for 1996-97 and 2003-04, the percentage increase in domestic prices has been more than that in the major trading partners. However, this has been neutralized, to some extent, by the rupee depreciation against the dollar.

 

Posted Date: 11/10/2012 7:23:04 AM | Location : United States







Related Discussions:- Neer vs reer, Assignment Help, Ask Question on Neer vs reer, Get Answer, Expert's Help, Neer vs reer Discussions

Write discussion on Neer vs reer
Your posts are moderated
Related Questions
Determinants of Social Demand for Education - Externalities The state has several objectives of which welfare and development of the people are most important. Promotion of cu

What are the three major types of unemployment?   a) Frictional b) Structural and c) Cyclical unemployment. Cyclical unemployment is broadly spread by an economy durin

a) The production function of certain firm is given as Q = 40 K 1/2 L 3/4 A unit of capital and labour costs Kshs 44 and Kshs 36 respectively. The firm would like to maxim

During the 1990s, technological advance reduced the cost of computer chips. Explain, with the use of supply and demand diagrams, how the following markets are affected in terms of

What is Rubenstein''s model in Game theory? A Rubinstein bargaining model is mainly refers to class of bargaining games which is main feature of alternating offers through an infi

What is Deflation?  Deflation in economics refers to reduce in the general price level, i.e. the nominal cost of goods and services as well as wages reduce. As, it is an opposi

TAKE A HYPOTHETICAL ECOMOMY AND CONSTRUCT THE CONSUMPTION SCHUDEL CONTAIN 10 PAIR OF HYPOTHETICAL VALUE OF AGGERGET INCOME AND CONSUMPTOIN

Insurance - Risk averse are willing to pay to keep away from risk. - If cost of insurance equals expected loss, risk averse people will buy sufficient insurance to totally r

1.  Moving from an economically inefficient to efficient allocation of resources will necessarily increase benefits by more than costs. 2.  There are two demand curves for a pri

Direct Marketing This is a marketing tool designed to elicit instant action from the customer through direct contact.