Consider the following statements regarding the Real Effective Exchange Rate (REER): 1. An increase in the REER generally indicates a decline in the price competitiveness of a country's exports. 2. REER takes into account inflation differentials between a country and its major trading partners. 3. REER is a more reliable indicator of external competitiveness than the Nominal Effective Exchange Rate (NEER).Which of the above statements are correct? |ForumIAS

[A] 1 and 2 only

[B] 2 and 3 only

[C] 1 and 3 only

[D] 1, 2 and 3

Answer: D

Notes:

Explanation:

Statement 1 is correct. A higher REER generally reflects an appreciated/overvalued currency, reducing export price competitiveness.
Statement 2 is correct. REER is the inflation-adjusted version of NEER.
Statement 3 is correct. Since it accounts for inflation differentials, REER provides a better measure of a country’s external competitiveness than NEER.

Source- TH