Q. With reference to the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER), which of the following statements is/are correct?
1.NEER reflects the relative price of domestic goods compared to foreign goods, accounting for inflation.
2.A decrease in a country’s NEER alongside an increase in its REER suggests that rising domestic inflation is counteracting the benefit of currency depreciation.
Select the correct answer using the codes given below:
Answer: B
Notes:
Explanations –
Statement 1 is incorrect. NEER does not account for inflation. It is a weighted average of a country’s nominal exchange rate relative to its trade partners’ currencies. NEER reflects only the nominal value of the exchange rate and does not adjust for price levels or inflation. REER (Real Effective Exchange Rate) is like NEER but adjusts for inflation. It shows if Indian goods are becoming cheaper or costlier compared to foreign goods.
Statement 2 is correct. A decrease in NEER (nominal depreciation) alongside an increase in REER (real appreciation) indicates that domestic inflation is rising faster than in trade partner countries, offsetting the benefits of currency depreciation.
Source: The Hindu
