Real Effective Exchange Rate Calculation

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Real Effective Exchange Rate (REER) Calculator

Analyze currency value adjusted for inflation and trade competitiveness

Units of domestic currency per 1 unit of foreign currency.
Current Consumer Price Index of your home country.
Consumer Price Index of the trading partner.
Calculated Real Exchange Rate (RER):
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What is the Real Effective Exchange Rate (REER)?

The Real Effective Exchange Rate (REER) is a critical economic indicator used to measure a country's international competitiveness. Unlike the nominal exchange rate, which simply tells you how much of one currency you can buy with another, the REER accounts for inflation differentials between trading partners.

The Calculation Formula

To calculate the Real Exchange Rate (RER) between two countries, we use the following formula:

RER = e × (P* / P)
  • e: The Nominal Exchange Rate (Domestic currency per foreign currency).
  • P*: The Price Level (CPI) of the foreign country.
  • P: The Price Level (CPI) of the domestic country.

Why REER Matters for Investors and Policy Makers

REER is often used to determine if a currency is "undervalued" or "overvalued" relative to its trading partners.

  • An Increasing REER: Suggests that the country is losing competitive edge. Its exports are becoming more expensive for foreigners, while imports become cheaper for domestic consumers.
  • A Decreasing REER: Indicates an improvement in trade competitiveness. Exports are cheaper abroad, which can lead to a surge in the trade balance surplus.

Example Calculation

Imagine the USD/EUR nominal rate is 1.10 (1.10 Dollars per 1 Euro). If the US (Domestic) CPI is 110 and the Eurozone (Foreign) CPI is 105:

Real Rate = 1.10 × (105 / 110) = 1.05.

In this case, the Real Exchange Rate is lower than the Nominal Rate, suggesting that after adjusting for inflation, the currency's purchasing power parity differs from its market price.

function calculateREER() { var nominal = parseFloat(document.getElementById('nominalRate').value); var domesticCPI = parseFloat(document.getElementById('domesticCPI').value); var foreignCPI = parseFloat(document.getElementById('foreignCPI').value); var resultArea = document.getElementById('resultArea'); var rerOutput = document.getElementById('rerOutput'); var interpretation = document.getElementById('interpretation'); if (isNaN(nominal) || isNaN(domesticCPI) || isNaN(foreignCPI) || domesticCPI <= 0 || foreignCPI nominal) { interpretation.innerHTML = "The Real Exchange Rate is " + Math.abs(diff).toFixed(2) + "% higher than the nominal rate. This suggests the foreign currency has higher relative purchasing power than the nominal rate indicates."; } else if (rer < nominal) { interpretation.innerHTML = "The Real Exchange Rate is " + Math.abs(diff).toFixed(2) + "% lower than the nominal rate. This indicates domestic inflation is outpacing the trading partner, potentially reducing trade competitiveness."; } else { interpretation.innerHTML = "The Real Exchange Rate is equal to the nominal rate. Purchasing power is in equilibrium based on current price levels."; } }

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