What is the Nominal Effective Exchange Rate (NEER)?
The weighted geometric average of the home currency's bilateral nominal exchange rates about other currencies is known as the NEER. The nominal effective exchange rate is the domestic money needed to purchase foreign currency (NEER). The NEER measures a country's capacity to compete internationally in the foreign exchange (forex) market. The NEER is also called the trade-weighted currency index among forex dealers.
NEER can be adjusted to account for the inflation rate of the home country relative to the inflation rates of the trading partners of the home country. NEER is not based on each currency's specific links in a nominal exchange rate. Instead, a single, focused statistic—typically an index—shows how the value of one local currency compares to several other currencies at once. Due to changes in macroeconomic and external sector performance brought on by structural changes in the Indian economy, 2015–16 has been chosen as the new base year for the NEER indices. The Nominal Effective Exchange Rate (NEER) of the rupee, about 40 trading partners, and six other currencies are decided by the Reserve Bank of India.
The final number is the Real Effective Exchange Rate (REER). The Nominal Exchange Rate defines the quantity of local money required to purchase foreign currency. The trade-weighted currency index, often known as NEER, measures a country's capacity to compete globally in the foreign exchange (forex) market.
Check out the article on Major Stock Exchanges for the UPSC IAS Exam.
Formula to Calculate NEER (NEER Formula)
The NEER is vital for gauging a nation's global competitiveness in foreign exchange. It considers inflation differences via the Real Effective Exchange Rate (REER). The NEER offers a comprehensive perspective on currency value against multiple others, aiding a broader exchange rate evaluation.
The formula for NEER:
NEER = (w1 * ER1) + (w2 * ER2) + … + (wn * ERn)
Here:
- NEER stands for Nominal Effective Exchange Rate.
- w1, w2, …, and we are weighted for each foreign currency in the basket.
- ER1, ER2, …, ERn are exchange rates of domestic currency with each foreign one.
Weights reflect currency importance in international trade. Exchange rates can be market or official based on data availability and context.
Checkout the video on 'Reer and Neer' and boost your preparation
