REER and NEER

Starter
What is it?

REER
Real Effective Exchange Rate
(REER) the inflation adjusted
exchange rate of one currency
against a basket of currencies,
weighted according to trade with
each country

NEER
Nominal Effective Exchange Rate
(NEER) the exchange rate of one
currency against a basket of
currencies, weighted according to
trade with each country (not
adjusted for inflation)

Task
Explain the difference between
the NEER and the REER (4)
Explain the difference between
internal devaluation and
external devaluation (4)

Explain this
Unlike Latvia, Iceland has a floating exchange rate.
Icelands nominal effective exchange rate (NEER)
index depreciated by almost 50% after the end of
2007. In comparison, Latvias NEER was broadly
unchanged (see Fig. 4.2).
Latvia was more dependent on a change in its real
effective exchange rate (REER), which depreciated by
around 20% measured in terms of unit labour costs.
This compares to a 45% depreciation in Icelands
REER based on changes in unit labour costs.

Plenary
What are they?