Neer vs reer, Microeconomics

Assignment Help:

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.

 


Related Discussions:- Neer vs reer

Keys of the profit maximisation in production technology, What are the keys...

What are the keys of the profit maximisation in production technology? Profit Maximization in production technology: a. Producer Behavior b. Producer’s Optimal Choice

Monopsony, What are the advantages and disadvantages of monopsony?

What are the advantages and disadvantages of monopsony?

Axioms - consumer choice involving risk, Axioms: It is possible to con...

Axioms: It is possible to construct a utility index which can be used to predict choice in uncertain situations if the consumer conforms to the following five axioms:  • A

The theory of Consumer Choice and Production and cost, ECM101 – MICROECONOM...

ECM101 – MICROECONOMIC POLICY ASSIGNMENT 1 General Guidelines: This assignment comprises two sections and you must answer all questions in each section. Answers must be explained

International Trade Economics, What is International Trade Economics, Expla...

What is International Trade Economics, Explain study area of international trade economics.

Milk, The price of milk is usually much less expensive in a grocery store v...

The price of milk is usually much less expensive in a grocery store versus a convenience store. Using economic terminology, explain why people purchase milk at convenience stores.

Project work, PLEASE GIVE ANY ONE TOPIC OF ECONOMIC WITH ANSWERS

PLEASE GIVE ANY ONE TOPIC OF ECONOMIC WITH ANSWERS

Inverse demand function, Inverse Demand Function: If variable factor prices...

Inverse Demand Function: If variable factor prices changes, then the isocost line will tilt and consequently, the optimal factor requirement will be different. Suppose the wage rat

How is the wrong conclusion result in necessary condition, How is the wrong...

How is the wrong conclusion result in necessary condition not in the sufficient condition? This is often heard that the market institution must not be used based onto the fact

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd