Loading the player...

What is the 'Real Effective Exchange Rate - REER'

The real effective exchange rate (REER) is the weighted average of a country's currency relative to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country's currency against each country within the index. This exchange rate is used to determine an individual country's currency value relative to the other major currencies in the index, such as the U.S. dollar, Japanese yen and the euro.

BREAKING DOWN 'Real Effective Exchange Rate - REER'

The REER is used to measure the value of a specific currency in relation to an average group of major currencies. The REER takes into account any changes in relative prices and shows what can actually be purchased with a currency. This means that the REER is normally trade-weighted.

The REER is derived by taking a country's nominal effective exchange rate (NEER) and adjusting it to include price indices and other trends. The REER, then, is essentially a country's NEER after removing price inflation or labor cost inflation. The REER represents the value that an individual consumer pays for an imported good at the consumer level. This rate includes any tariffs and transaction costs associated with importing the good.

A country's REER can also be derived by taking the average of the bilateral real exchange rates (RER) between itself and its trading partners and then weight it using the trade allocation of each partner. Regardless of the way in which REER is calculated, it is an average and considered in equilibrium when it is overvalued in relation to one trading partner and undervalued in relation to a second partner.

Benefits of Analyzing and Using the REER

A country's REER is an important measure when assessing its trade capabilities and current import/export situation. The REER can be used to measure the equilibrium value of a country's currency, identify the underlying factors of a country's trade flow, look at any changes in international price or cost competition, and allocate incentives between tradable and non-tradable sectors.

A country can positively affect its REER through rapid productivity growth. When this happens, the country realizes lower costs and can reduce prices, thus making the REER more advantageous for the country.

Understanding a country's REER is extremely important when conducting economic analysis and policymaking. Therefore, the World Bank, the Eurostat, the Bank for International Settlements (BIS) and others all publish various REER indicators. These world institutions combine to provide the public with REER analysis on 113 countries around the globe.

  1. Key Currency

    The currency used as a reference in an international transaction ...
  2. International Currency Exchange ...

    An international currency exchange rate is the rate at which ...
  3. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  4. Balanced Trade

    A condition in which an economy runs neither a trade surplus ...
  5. Terms of Trade - TOT

    Terms of trade (TOT) are the ratio between a country's export ...
  6. Currency ETF

    Currency ETFs aim to replicate movements of a single currency ...
Related Articles
  1. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  2. Trading

    How Undervalued Is The Yuan?

    Some argue that the large U.S. trade deficits over the past 15 years are primarily due to currency management by U.S. trading partners.
  3. Managing Wealth

    Evaluating country risk for international investing

    Investing overseas begins with determining the risk of the country's investment climate.
  4. Trading

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
  5. Insights

    What Is Purchasing Power Parity? (PPP)

    Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a market "basket of goods" approach.
  6. Trading

    Top 5 Reasons To Invest In Currencies

    Here's why you should get into the forex market.
  7. Trading

    Dollarization Explained

    Find out how fledgling economies can find some stability in their currency and attract foreign investment.
  8. Trading

    Profiting From a Weak U.S. Dollar

    Learn how to allocate your investments when the U.S. dollar is down.
  9. Trading

    Top Economic Factors That Depreciate The $US

    A variety of factors contribute to currency depreciation, including monetary policy, inflation, demand for currency, economic growth and export prices.
  10. Insights

    5 Economic Effects Of Country Liberalization

    Liberalization of countries in emerging markets provides new opportunities for investors to increase their diversification and profit.
  1. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
  2. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
  3. How does a capital account illustrate the strength of investment markets for a country?

    Understand what a country's capital account is and how the capital account level can be used to gauge the strength of investment ... Read Answer >>
  4. How often do exchange rates fluctuate?

    Exchange rates float freely against one another, which means they are in constant fluctuation. Currency valuations are determined ... Read Answer >>
  5. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade and how it is used as an economic indicator. Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center