EUR/USD nominal effective exchange rate and real effective exchange rate

Nominal Effective and Real Effective Exchange Rates

By admin, March 20, 2016

In this article we shall discuss the Nominal Effective and Real Effective Exchange Rates, which are fundamental for complex long term analysis and forecasting of an exchange rate as that way we can analyze the Demand and Supply of a Foreign Currency in a country. In Economic Theory prices, including foreign exchange rates, depend on Demand and Supply and everything else like Export/Import, Expectations, Rates, Inflation, Unemployment etc. are factors directly or indirectly influencing the Demand and Supply of foreign currency and consequently the exchange rate. We shall discuss the Demand and Supply of foreign currency in the next article.

The exchange rate of a national currency can change towards different foreign currencies in a different directions and different proportions. For example, USD can appreciate towards EUR, but depreciate towards GBP at the same time frame. For the purpose of understanding the dynamics of a currency we need to use an index of a currency exchange rate or in other words, the Nominal Effective Exchange Rate.

Nominal Effective Exchange Rate is an index of a currency exchange rate which is calculated based on relation of a national currency and a basket of foreign currencies. The basket is weighted based on specific gravity (density) of foreign currencies in the currency transactions of the national economy. Nominal Effective Exchange Rate is calculated in the following way:
Calculate Nominal Effective Exchange Rate
Where:
nominal effective exchange rate – is the Nominal Effective Exchange Rate.

i – is the trade partner country.
nominal exchange rate index – is the index of nominal exchange rate which is equal to nominal exchange rate, in the timeframe under review, divided to the nominal exchange rate in the base timeframe.
country trade partner specific gravity (density) – is a specific gravity of a country/trade partner in the total International Trade of a Nation under review. It’s calculated dividing the sum of EX (export) and IM to and from the trade partner to the total EX and IM of the Nation under review in the timeframe under review.

The steps for calculating the Nominal Effective Exchange Rate according to IMF (International Monetary Found) are the following:
1) Choose base year, it should be the year when the country under review had the highest profit in international trade, so EX-IM=max
2) Choose calculation method for calculating the mean, median or mode value of the exchange rate for a year.
3) Identify which countries can be accounted as main trade partners of the National economy under review, based on EX+IM values from highest to lowest.
4) Calculate the specific gravity of a trade partner in the total International Trade of the National economy under review.
5) Calculate the index of the exchange rates of the countries based on the base year exchange rate.
6) Weight the calculated exchange rates based on specific gravity of each trade partner in the IT of the Nation under review.

Nominal Effective Exchange Rate shows the price of the currencies, however not the price levels in the country. In order to understand the real trends we need to take into account the Inflation. We can do that using the Real Effective Exchange Rate. The Real Effective Exchange Rate is calculated in the following way:
Calculate real effective exchange rate
Where:
real effective exchange rate – is Real Effective Exchange Rate.
real exchange rate index – is the index of real exchange rate which is equal to real exchange rate, in the timeframe under review, divided to the real exchange rate in the base timeframe.

The Real Effective Exchange Rate is an indicator describing the competitiveness of a country in the International Market and must be taken into consideration as a key factor when predicting if a Central Bank of a country will change the Interest Rates or not, or if yes, how will it affect the International Trade of the country and consequently the National Economy, consequently the exchange rate. If the Real Effective Exchange Rate is increasing, then the competitiveness of the country is downcreasing, Export is becoming more expensive and consequently downcreasing and Import is becoming cheaper, consequently increasing and vice versa. Even more, when creating the index taking as a basis the year when the EX-IM=max, we can find the possible target Real Effective Exchange Rate of the Central Bank when intervening and reviewing Interest Rates in the long run.

In the next articles we will show how to calculate the Nominal Effective Exchange Rate and how to calculate the Real Effective Exchange Rate with an example.

Any questions? Please ask in the Forex Traders Forum

117 Comments

  1. Oh my goodness! Incredible article dude!

    Thank you, However I am going through problems with your RSS.
    I don’t understand why I am unable to join it. Is there anyone
    else getting the same RSS issues? Anybody who knows the solution can you kindly respond?

    Thanx!!

  2. Pensivly says:

    You could certainly see your enthusiasm in the work you write.
    The arena hopes for more passionate writers like you who are not afraid to mention how they believe.

    At all times follow your heart.

  3. read more says:

    Hey there just wanted to give you a quick heads up.
    The text in your post seem to be running off the screen in Chrome.
    I’m not sure if this is a format issue or something to do with internet browser compatibility but
    I figured I’d post to let you know. The style and design look great though!
    Hope you get the problem fixed soon. Thanks

  4. Hi there to all, how is the whole thing, I think every one is getting
    more from this website, and your views are nice in favor of new viewers.

  5. Hi, I do think this is a great site. I stumbledupon it 😉 I will revisit yet again since
    I saved as a favorite it. Money and freedom is the greatest way to change, may you be rich and continue to guide other people.

  6. Good answer back in return of this matter with solid arguments and describing all concerning that.

  7. dog food says:

    I was curious if you ever considered changing the layout of your website?
    Its very well written; I love what youve got to say.
    But maybe you could a little more in the way of content so people could connect with it better.

    Youve got an awful lot of text for only having one or 2 images.
    Maybe you could space it out better?

  8. Right now it looks like BlogEngine is the preferred blogging
    platform out there right now. (from what
    I’ve read) Is that what you are using on your blog?

  9. Webkatalog says:

    useful I am sure there will be hundreds of people that appreciate this information. This is my very first comment,
    I think I like this!. perseverance to keep up Have
    you considered promoting your blog? add it to SEO Directory
    right now 🙂 http://www.links.m106.com

  10. Very energetic post, I loved that a lot. Will there be a part 2?

  11. I have read so many content about the blogger lovers except
    this article is genuinely a good post, keep it up.

  12. more info says:

    If they believe Joe Biden will win, then their cash must be on the Democratic celebration for this
    wager.

  13. I’m pretty pleased to discover this web site. I want
    to to thank you for your time for this wonderful read!!
    I definitely appreciated every bit of it and i
    also have you book-marked to look at new information on your site.

  14. website says:

    If you are going for best contents like me, just visit this site all the time as it
    presents quality contents, thanks

  15. Superb post but I was wanting to know if you could write a litte more on this subject?
    I’d be very grateful if you could elaborate a little bit
    more. Thank you!

  16. check here says:

    It’s very easy to find out any topic on net as compared to textbooks,
    as I found this article at this web site.

  17. forex says:

    Great delivery. Solid arguments. Keep up the amazing effort.

  18. Do you mind if I quote a few of your articles as long as I provide credit and sources back to your blog? My blog site is in the very same area of interest as yours and my visitors would definitely benefit from some of the information you present here. Please let me know if this okay with you. Regards!

  19. Every weekend i used to pay a visit this website, because i
    wish for enjoyment, as this this web site conations truly pleasant funny data too.

  20. I pay a visit each day some web pages and blogs to read articles, but this blog
    provides feature based writing.

  21. My partner and I stumbled over here by a different web page and thought I may as well check things out.
    I like what I see so now i’m following you. Look forward to looking
    at your web page again.

  22. This paragraph will help the internet visitors for building up new website or even a
    weblog from start to end. http://anuluj-dlugi.org/upadlosc-konsumencka-drazewo.php

  23. more info says:

    Thank you for the good writeup. It in fact was a amusement
    account it. Look advanced to far added agreeable from you!
    However, how could we communicate?

  24. joker123 says:

    I’m extremely impressed together with your writing skills as smartly as with the layout for your blog.
    Is this a paid topic or did you modify it your
    self? Anyway keep up the nice quality writing, it
    is rare to look a nice weblog like this one nowadays..

  25. ass says:

    Hello, i read your blog occasionally and i own a similar one and i was just
    wondering if you get a lot of spam remarks?
    If so how do you reduce it, any plugin or anything you can suggest?
    I get so much lately it’s driving me insane so any support is very much
    appreciated.

    Also visit my web site – ass

  26. Aw, this was a very nice post. Taking the time and actual effort to produce a good article… but what can I say… I procrastinate a lot and don’t seem to get nearly
    anything done.

  27. check here says:

    you’re really a good webmaster. The web site loading speed is incredible.
    It seems that you are doing any distinctive trick. Also, The
    contents are masterpiece. you have performed a magnificent process in this topic!

  28. I know this web page provides quality based posts and other material,
    is there any other site which provides these kinds of things in quality?

  29. cbd 5 olejek says:

    When someone writes an post he/she retains the idea of a user in his/her brain that how a user can know it.
    Therefore that’s why this piece of writing is amazing.
    Thanks!

    Review my blog :: cbd 5 olejek

  30. Profile says:

    Hello I am so grateful I found your weblog, I really found you by error, while I was looking
    on Digg for something else, Nonetheless I am here now and
    would just like to say thanks a lot for a tremendous post and
    a all round entertaining blog (I also love the theme/design), I don’t have time to browse it all at
    the minute but I have saved it and also included your RSS feeds,
    so when I have time I will be back to read more, Please do keep up the excellent work.

  31. Candida says:

    Hurrah, that’s what I was looking for, what a data!
    existing here at this weblog, thanks admin of this site.

  32. 유흥업소 says:

    At the EDD, we can assist you get back to safe and appropriate work and meet the operate search requirement.

  33. Your method of explaining all in this article is in fact good, every one
    be able to without difficulty know it, Thanks a lot. https://sites.google.com/view/kancelaria-upadlosc/home

  34. Restumping says:

    What i do not understood is in reality how you’re now not actually much more well-preferred
    than you may be now. You are very intelligent. You know therefore considerably on the subject
    of this matter, made me in my opinion believe it
    from a lot of numerous angles. Its like men and women don’t seem to be involved until
    it’s one thing to accomplish with Lady gaga!
    Your individual stuffs outstanding. All the time care for it up!

    Here is my blog post: Restumping

  35. It’s a pity you don’t have a donate button! I’d without a doubt
    donate to this fantastic blog! I guess for now i’ll settle for
    book-marking and adding your RSS feed to my Google account.
    I look forward to brand new updates and will talk about this site with my Facebook group.

    Chat soon!

  36. I am actually grateful to the owner of this site who has shared this great post at here.

  37. I’m now not positive the place you are getting your info, but good topic.
    I needs to spend some time studying much more or figuring out more.

    Thanks for wonderful information I was on the lookout for this information for my mission.

  38. Upadłość Konsumencka Sanok Upadłość jest statusem prawnym osoby lub innego
    podmiotu, który nie może spłacić długów, które jest winien wierzycielom.
    W większości jurysdykcji, upadłość jest nakładana przez nakaz sądowy, często zainicjowany przez dłużnika.
    Upadłość nie jest jedynym statusem prawnym, jaki może mieć osoba niewypłacalna, dlatego też termin upadłość nie jest synonimem niewypłacalności.

    W niektórych krajach, w tym w Wielkiej Brytanii, upadłość jest ograniczona do
    osób fizycznych, a inne formy postępowania upadłościowego (takie jak likwidacja i zarząd) są
    stosowane w odniesieniu do przedsiębiorstw. W Stanach Zjednoczonych upadłość stosuje się szerzej
    w odniesieniu do formalnego postępowania upadłościowego.
    W tym kontekście, dłużnik jest osobą lub innym podmiotem,
    który jest winien pieniądze. – Upadłość Konsumencka Sanok https://sites.google.com/view/upadlosckonsumenckasanok/

  39. Howdy! Someone in my Myspace group shared this
    site with us so I came to check it out. I’m definitely loving
    the information. I’m book-marking and will be tweeting this
    to my followers! Wonderful blog and brilliant style and design.

  40. hello there and thank you for your info – I have definitely picked up something new
    from right here. I did however expertise some technical points using this web site, since I experienced to reload the
    web site many times previous to I could get it to load properly.
    I had been wondering if your web hosting is OK? Not that I’m complaining, but slow loading
    instances times will very frequently affect your placement in google and could damage your high-quality score if ads and marketing with
    Adwords. Anyway I’m adding this RSS to my email and can look out for a
    lot more of your respective fascinating content. Ensure that you update this again soon.

  41. It’s really very complex in this busy life to listen news on TV, so
    I only use the web for that reason, and obtain the most recent news.

  42. Valuable info. Fortunate me I found your web site accidentally, and I’m surprised why this coincidence didn’t happened in advance!
    I bookmarked it.

  43. takipçi says:

    Undeniably consider that that you stated. Your favourite justification appeared to
    be at the net the simplest thing to consider of. I say to you, I definitely get annoyed at the same time as other people consider
    issues that they plainly don’t recognize about. You controlled to
    hit the nail upon the top as smartly as outlined out the whole thing without having side-effects , other people can take a
    signal. Will probably be again to get more. Thanks

  44. I like what you guys are up too. This kind of clever work and
    coverage! Keep up the wonderful works guys I’ve
    added you guys to my blogroll.

  45. Hi just wanted to give you a quick heads up and let you know a few of the images aren’t loading properly.

    I’m not sure why but I think its a linking issue.
    I’ve tried it in two different browsers and both show the same outcome.

  46. Hello would you mind letting me know which web host you’re
    utilizing? I’ve loaded your blog in 3 completely different web browsers and
    I must say this blog loads a lot faster then most. Can you
    suggest a good internet hosting provider at a honest price?

    Thanks, I appreciate it!

  47. Hi there! I could have sworn I’ve visited this blog before
    but after looking at many of the articles I realized it’s new to me.

    Anyhow, I’m definitely pleased I stumbled upon it and I’ll be book-marking it and checking back
    regularly!

  48. This paragraph presents clear idea designed for
    the new viewers of blogging, that truly how to do blogging and site-building.

Leave a Comment to TeoRiz

Leave a Reply to TeoRiz Cancel reply

Your email address will not be published. Required fields are marked *