| NEER | REER |
|---|---|
| Nominal Effective Exchange Rate (NEER) is an unadjusted weighted average rate at which the currency of one country exchanges for a basket of multiple foreign currencies. It is the weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies. | Real Effective Exchange Rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies. The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index. |
| NEER is a measure of the value of a currency against a weighted average of several foreign currencies. | REER compares a nation’s currency value against the weighted average of the currencies of its major trading partners. |
| It reflects the relative value of a currency with respect to that of the trading partners. | It reflects the inflation-adjusted value of a currency with respect to that of the trading partners. |
| NEER is calculated as the geometric weighted average of bilateral exchange rates of the home currency in terms of trading partner currencies. | REER is the NEER adjusted by the weighted average of the ratio of domestic price to foreign prices. REER is the Nominal Effective Exchange Rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs. |
| It is calculated based on a basket of currencies. | It is calculated based on NEER. |
| NEER is an indicator which tells about a country’s international competitiveness in terms of the foreign exchange (forex) market. NEER, sometimes, is also known as the trade-weighted currency index. | REER is an indicator of the overall external competitiveness of a country in comparison with its trade partners. |
| An increase in NEER indicates the appreciation of the rupee, whereas a decrease in its value denotes the depreciation of the rupee. A higher NEER value means that the home country’s currency is usually worth more than an imported currency, and a lower value means that the home currency is usually worth less than the imported currency. | An increasing REER of a country indicates a rise in the value of its currency vis-à-vis trading partners (trading partners will pay more for buying domestic goods) and thus, a loss of competitiveness. An increasing REER indicates that a country is losing its competitive edge. An increase in the REER of a country implies that its exports become more expensive and its imports become cheaper. |
| It is not an accurate measure of a currency’s strength as it is not adjusted for inflation differential. NEER only describes the relative value; it cannot definitely show whether a currency is strong or gaining strength in real terms. | It is considered a more accurate measure to gauge a currency’s strength. REER captures the exchange rate with a greater degree of accuracy as compared to the NEER, as it also takes into account the domestic inflation in various economies |
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