REER Full Form
What is the full form of REER?
REER is an abbreviation for Real Effective Exchange Rate. It refers to the weighted average of several countries’ currencies, concerning the index of many major countries. Weighted Average is the calculation of the average of a ‘Set of Numbers’ each with distinct associated values. The weights can be evaluated by comparing the respected trade balance of a country’s currency with each country’s index. It shows a relatively-adjusted value of a currency, for the trading partners. It is examined as a more accurate scale to determine a currency’s strength. When a REER increases, it shows the rise in expenses of a country’s export or trading market, and cheaper imports. It may lead to losing its trading competitiveness.
- What is the full form of REER?
- How to Calculate REER?
- Steps to Calculate REER:
- Limitations of REER
How to Calculate REER?
The currency of a nation can be regarded as overvalued, undervalued, or in a state of equilibrium. The Equilibrium is a state, in which the demand and supply are balanced equally, and the value will remain stable.
A country’s REER shows how well is the balancing of a currency rate in the trading market.
The Formula to Calculate REER is:
\mathrm{REER = \prod_{i = 1}^{n}\left [\frac{^{S^{i}}}{S_{i}^{*}}*\frac{P^{i}}{P_{MD}} \right ]^{_{w_{i}}}}
n = number of countries from the index
Si = exchange rate of the national currency against the currency of the country i
S_{i}^{*} = exchange rate of the national currency against the currency of the country i during the base period
Wi = country’s weight (of the currency) in the index
Pi = inflation rate in the i
PMD = inflation rate in the Republic of Moldova
Steps to Calculate REER:
The REER of the country can be calculated by taking the average of ‘bilateral exchange rates between its trading partners and itself, by considering it using the trade allocation of its trading partner.
Then, calculate the average of exchange rates after allocating the weightings of each rate. For instance, if a currency had 50% weighting, the exchange rate will be raised to the exponent by 0.50.
Multiply each exchange rate by each other in Step 2.
Then, multiply the ultimate result by 100 to generate the index or scale.
Some of the calculations use Bilateral Exchange Rates, while other measures use Real Exchange Rates, and it adjusts the exchange rate for inflation.
Despite the way, how the REER is calculated, it’s an average that specifies when a currency is overvalued corresponding to one trading partner, and is undervalued corresponding to another partner.
Limitations of REER
It does not take into account tariffs, price changes, and various other factors that can affect trade between countries.
The weighting that is used in the REER measure may need to adjust in some cases to show any change in trade.
The Central Bank of any nation can establish or change its home policies, and interest rate for its own country. This can affect the exchange rate of the currency.
The REER would be affected more as per interest rate markets, and little for trade markets.
Frequently Asked Questions (FAQs)
REER tells a balanced value of a country’s currency, and identifies the factors of the country’s trade stream like technological changes, competition in the trading market, and ultimately the weighting index.
A REER shows an average rate, which is more stable than several other exchange rates, and indicates the exceeded and preceded trading flow.
It measures an effective exchange rate, which is divided by an index of costs.
The increased REER indicates that the exports become expensive, and imports become cheaper.
An equilibrium state shows an equal demand and supply in the trading system of a country. It can affect a country’s currency exchange rate.