100) ↓ relative purchasing power of home currency, real depreciation of home currency ↑ international competitiveness Real rate↓ ( 100 home currency (VND) depreciate against a basket of currencies NEER < 100 home currency (VND) appreciate against a basket of currencies NEER versus CPI Semilar calculation method, CPI for normal goods and services, NEER for special goods (foreign currency) Like NER, NEER does not take account of the effect of exchange rate changes on comptitive position In order to get a better idea of changes in a country‘s comptitive position overtime we could need compile the real effective exchange rate index TS Nguyễn Phúc Hiền - ðại học Ngoại thương 25 Nominal and Real Effective Exchange Rate (4) Real Effective Exchange Rate - REER Weighted average of bilateral rates adjusted by inflation differentials n REERi = ∑ erij wj j =1 erij real bilateral exchange rate j number of currencies, i the period TS Nguyễn Phúc Hiền - ðại học Ngoại thương 26 Nominal and Real Effective Exchange Rate Time RER Index e rij RER Index (USD/VND) (Euro/VND) (w=0,6) (w=0,2) RER Index (JPY/VND) (w=0,2) REER 100 100 100 100 105 110 110 107 115 110 115 114 120 115 115 118 TS Nguyễn Phúc Hiền - ðại học Ngoại thương 27 Source: Keith Pileam TS Nguyễn Phúc Hiền - ðại học Ngoại thương 28 Conclusion • • • • The exchange rate is affected by international trade, international capital flow, inflation, interest rate, income expection and government controls The exchange rate influences international trade competitiveness Real depreciation of home currency encourages exports and declines imports The NER, RER, NEER and REER help to understand further the exchange rate and international trade competitiveness TS Nguyễn Phúc Hiền - ðại học Ngoại thương 29 ...Contents Factor Affecting exchange rate Exchange rate and international competitiveness Nominal exchange rate (NER) and real exchange rate (RER) Nominal effective exchange rate (NEER) and... Exchange rate –NER Real Exchange rate- RER Nominal Effective Exchange rate- NEER Real Effective Exchange rate REER TS Nguyễn Phúc Hiền - ðại học Ngoại thương 12 Nominal and Real Exchange Rates (1)Nominal... of rate; ∏ home inflation rate; ∏* foreign inflation rate) TS Nguyễn Phúc Hiền - ðại học Ngoại thương 16 Nominal and Real Exchange Rates (2)Real Exchange Rate- RER Concept The real exchange rate