Real Effective Exchange Rate - REER

  

Categories: Econ

REERRRR…screech. REER’s are always on the move. What a life.

The real effective exchange rate (REER) is a way to compare currencies of different countries. REER is the weighted average of one currency compared to a group of other nations’ currencies, adjusting for inflation and trade.

REER allows us to see which countries are gaining a competitive edge on others, and which are falling behind. A lot of this has to do with each country’s trade game. It’s like the Olympics of international currency. You can watch it live at the World Bank. Okay, you can’t watch it live, but the World Bank does publish REERs on the reg.

The biggest stars of the REER games? The U.S. dollar, the Japanese Yen, and the Eurozone Euro.

If you’re looking for investing parameters, you can skip REER and just head straight to currency exchanges. REER is more for governments comparing themselves to each other, which isn’t as helpful as the pure currency exchange rates for traders.

Related or Semi-related Video

Finance: What are Gross Domestic Product...8 Views

00:00

Finance Allah Shmoop What are gross domestic product GDP and

00:07

gross national product GNP So how do you know how

00:13

great your country is Well you can measure how many

00:16

missiles you have or you can count the number of

00:18

Olympic gold medals You've one or you can count the

00:21

number of Starbucks locations you have all over your country

00:24

for you can measure the strength of your economy Well

00:27

how do you do that Economists used to main measures

00:30

One is called gross domestic product called gross national product

00:34

Gross domestic product might sound like what happens when you

00:36

flush a baby alligator down the toilet And three years

00:39

later it crawls back out looking for its mommy But

00:42

in actuality it represents the total value of all the

00:45

stuff you make in your country along with all the

00:47

services you provide You know like legal services and dental

00:51

cleaning services and stuff like that And you know that's

00:54

provided by your citizens There You live on the sovereign

00:57

island nation of squish squad Scary Located just offshore of

01:02

Norway you are one of twelve inhabitants and all of

01:05

you fish for herring all day Each of you catch

01:08

an average of ten pounds of herring every day Hearing

01:10

sells for about ten bucks a pound and everyone works

01:13

two hundred days a year so multiply that all up

01:16

and you get twelve People work in two hundred days

01:19

a year each each catching ten pounds each day with

01:23

each pound selling for ten bucks And well you could

01:25

say the GDP of squish squad Scary is two hundred

01:29

forty thousand dollars That's the value of all the stuff

01:32

you're country made in a year Meanwhile elsewhere in the

01:35

world the numbers get a bit higher For instance the

01:37

GDP of the U S was about nineteen trillion dollars

01:40

in two thousand seventeen so Well yeah that's a little

01:43

bit more But of course the U S has three

01:45

hundred twenty five million ish people in it instead of

01:49

the twelve squid squid aeons And its GDP includes things

01:53

like airplane manufacturing and high value financial transactions And you

01:58

know shmoop subscription sales instead of just herring fishing So

02:02

it makes sense that the U S economy would be

02:04

much much bigger toe Look at how an economy is

02:06

doing People usually watch how it changes over time say

02:09

one of your fellow squish Quaid Ian's starts fishing with

02:13

dynamite Well it's a new technique Output goes from ten

02:16

point today to twelve next year With the new output

02:19

your GDP goes two hundred eighty eight thousand from the

02:23

two forty and change before That's twenty percent GDP growth

02:27

in a year We'll guess what big complex economies like

02:30

the US pretty much never see growth rates like that

02:33

Economists usually consider it a healthy growth rate to be

02:36

more like two or three percent in a given year

02:38

Smaller countries and developing countries can have bigger growth rates

02:42

Right Like take China It's a big country biggest population

02:45

in the world with no more than a billion and

02:47

a half people But it's still racks up relatively high

02:50

GDP growth rates because of the rapid expansion of its

02:54

manufacturing base Right they optimize their farmers and take them

02:57

from growing turn ups and instead have them assemble semiconductors

03:01

and stuff like that way higher margin to sell a

03:03

semiconductor than a turnip As recently as two thousand ten

03:07

China put up annual GDP growth rates still in the

03:10

double digits like ten percent and hit double digits and

03:13

change for five consecutive years in the early two thousand

03:16

Well GDP doesn't always go up in nations around the

03:19

world The year after discovering dynamite fishing swish squad Ian's

03:23

suffered a Siri's of significant storms The number of work

03:26

days went down from two hundred to one ninety Everything

03:30

else stayed the same self In that year GDP fell

03:32

to two hundred seventy three thousand and change from the

03:35

two eighty eight It was the year before decline of

03:37

five percent Well he kind of is called that decline

03:40

a contraction if a contraction happens for two or more

03:43

quarters in a row so like two three months periods

03:46

in a row the country is considered to be in

03:48

a recession If the contractions air deep enough and last

03:51

long enough well then that's called the depression like it

03:54

goes on for a year Two years or three years

03:56

Both GDP and GNP measure the economic output of a

03:59

country but they used different definitions about what all that

04:03

entails Gross domestic product consists of all the products and

04:06

services made it given your inside the country So you

04:10

know made within the borders of the country made domestically

04:14

gross national product measures the stuff made by people or

04:17

companies from a country regardless of where it was actually

04:20

made like you're an American citizen No building pots or

04:24

pottery in Mexico We found that in the GNP number

04:27

so GDP tracks where it was made GNP tracks Who

04:30

made it So if an American it's a toilet cozy

04:33

while sitting in his living room in Des Moines that

04:36

gets included in both GDP and GNP However if an

04:40

American goes on vacation Teo Cameroon and it's a toilet

04:43

cozy in his hotel room there well that's included in

04:47

GNP but not in GDP was made by an American

04:51

but not in America Well meanwhile if the American comes

04:54

back home to Des Moines and a Scottish friend of

04:56

his comes over and it's a toilet cozy for him

04:59

that would count in GDP but not in GNP right

05:03

The toilet cozy was made in the US but not

05:06

by an American In the old days like before the

05:08

nineteen nineties GNP was typically used to track national economic

05:11

growth However with the dramatic rise of globalization around that

05:15

time GDP became much easier to track Eventually it became

05:18

the go to measure of growth to review Both GMP

05:22

and GDP track national economic output They both look at

05:25

the amount of goods and services produced by the country

05:27

though they have different working definitions about what that means

05:30

The size of GDP and GNP are impacted by the

05:32

size of a country In the level of economic and

05:34

technical sophistication Big complex economies like the US usually aspire

05:39

to modest growth like two or three percent smaller Countries

05:42

in developing economies can post much higher growth rates with

05:44

percentages in the double digits Not being all that uncommon

05:47

GDP measures the value of stuff produced within a country

05:50

regardless of who makes it GNP measures the value of

05:54

stuff made by citizens of a country regardless of where

05:57

it's made So if a squish squatty and citizen were

05:59

toe float a raft into Norwegian waters and catch some

06:02

herring there While that would count on GNP on their

06:05

books but not G Meanwhile if he invited a Norwegian

06:09

friend over for a day of fishing for anything that

06:11

Norwegian caught would count on the squish Wadi and GDP

06:15

but not on the squish Claudia and G N P

06:18

if the scratch Wadi Ins were to launch a surprise

06:20

attack on Norway However wealth and all bets would be 00:06:23.518 --> [endTime] off You just have to see who is

Up Next

Finance: What is stock based compensation?
7 Views

What is stock based compensation? Stock based compensation is exactly what it sounds like: a way to compensate employees using stock. It’s used i...

Finance: What Is a Real Return?
67 Views

What is real return? Real return is the actual return made from an investment after inflation is factored in. Return is expressed as a percentage c...

Find other enlightening terms in Shmoop Finance Genius Bar(f)