Topic: Indian Economy and issues relating to planning, mobilization of resources.
Q6. What is the Real Effective Exchange Rate (REER)? Assess its significance in assessing the international competitiveness of an economy. (10 M)
Difficulty Level: Medium
Reference: IE
Why the question
The recent depreciation of the Indian rupee and the debate over its becoming an undervalued currency have renewed focus on Real Effective Exchange Rate (REER) as a key indicator of external competitiveness.
Key Demand of the question
The question requires explaining the concept of REER and analysing its significance in assessing the international competitiveness of an economy, particularly in relation to trade, exchange rate policy and external sector performance.
Structure of the Answer:
Introduction
Define REER as an inflation-adjusted measure of a country’s exchange rate competitiveness.
Body
- Meaning of REER: Explain the concept, components and how it differs from a simple exchange rate measure.
- Significance of REER: Highlight its role in assessing export competitiveness, currency valuation and policymaking.
Conclusion
Conclude by emphasising that REER is an important guide for maintaining external competitiveness alongside productivity and macroeconomic stability.
