REER and NEER

REER and NEERStarterWhat is it?REERReal Effective Exchange Rate (REER) the inflation adjusted exchange rate of one currency against a basket of currencies, weighted according to trade with each country

NEERNominal 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)

TaskExplain the difference between the NEER and the REER (4)

Explain the difference between internal devaluation and external devaluation (4)

Explain thisUnlike 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.PlenaryWhat are they?