(a) It refers to average of value of country's, currency in relation to an index of basket of values major countries' currencies.
(b) It refers to nominal ratio of a country's currency value to average value of a basket of currency.
Codes :
Understanding Real Effective Exchange Rate (REER)
The Real Effective Exchange Rate (REER) is a key economic indicator reflecting a country's international price competitiveness. It represents the weighted average of a country's currency against a basket of other major currencies, adjusted for inflation differentials.
Evaluating Statement (a)
Statement (a) defines REER as:
- The average value of a country's currency.
- Measured against an index based on a basket of major countries' currencies.
This statement accurately captures the fundamental structure of an effective exchange rate, which inherently involves averaging the currency's value against a representative group of other currencies. While it doesn't explicitly detail the inflation adjustment, it correctly describes the 'effective' and 'basket' components.
Evaluating Statement (b)
Statement (b) defines REER as:
- The nominal ratio of a country's currency value.
- Compared to the average value of a currency basket.
This statement is incorrect because it refers to a nominal ratio. The REER is specifically a real measure, meaning it accounts for relative price levels or inflation. The description in statement (b) is closer to the definition of the Nominal Effective Exchange Rate (NEER).
Conclusion on Statements
Comparing the statements to the definition of REER:
- Statement (a) provides a partially correct description focusing on the weighted average against a currency basket.
- Statement (b) is incorrect as it defines a nominal ratio, whereas REER is a real exchange rate measure.
Therefore, only statement (a) is considered true in the context of defining the structure of REER.
Important Questions from Foreign exchange market
In which year did the companies IBM and Coca Cola shut down their operations for not being able to comply with the Foreign Exchange Regulation Act that mandated foreign investors cannot own over 40% in Indian enterprises?
Identify the drivers for increased Foreign Institutional Investment flows in Indian stock markets in recent times
A. Covid-19 pandemic driven liquidity outflows from the western capital markets
B. Geopolitical supply chain relocations
C. Increased India weightage in MSCI Emerging Market Index
D. Steep decline in interest rates in large market friendly economies
E. Favourable risk-reward ratios in Indian stock markets
Choose the correct answer from the options given below:
Which of the following constitutes Foreign Direct Investment?
Arrange the following modes of entry in foreign markets starting with the mode of entry having least commitment, risk, control and profit potential:
(A) Company hires a local manufacturer to produce the product.
(B) Company starts exports working through domestic export agents and exports management companies.
(C) Company joins hands with local investor and forms a company in which both share ownership and control.
(D) Company starts export using domestic export department and overseas sales branch.
(E) Company offers a complete brand concept and operating system to an investor in return of certain fee.
Choose the correct answer from the options given below:
Given below are two statements: One is labelled as Assertion A and the other is labelled as Reason R.
Assertion (A): Sustained current account surplus encourages the government to liberalize imports and capital movements.
Reasons (R): The current account and balance of payments positions of a country can significantly influence its economic policies.
In the light of the above statements, choose the correct answer from the options given below:
