International Finance Management

18.1: Exchange Rate Indices: NEER and REER As country’s currency can be compared with any other currency and a given country’s currency can be expected to appreciate compared some currencies while expected to depreciate against some other currency. But can we generalize, whether a given country currency is expected to appreciate or depreciate? This can be done so by comparing the currency value of any country with the currency value of its major trading partners. Since countries trade with many other countries, to determine the relative purchasing power of a given currency, it needs to be evaluated against all other currency values so that the currency’s true value can be identified. In other words, whether a currency is “over valued” or “under valued” compared to its major trading partners needs to be determined. This is done by calculating exchange rate indices. These indices are calculated by trade weighing bilateral exchange rates between the currency and its tradi...