EXCHANGE RATE.
MEANING OF EXCHANGE RATE.
The rate at which one currency is converted into another currency is the rate of exchange between the currencies concerned. In other words, exchange rate is the rate at which one currency can be exchanged for another. .
TYPES OF EXCHANGE RATE.
There are different types of exchange rates:.
I. Nominal Effective Exchange Rate (NEER) - Nominal Exchange Rate is the price of one country in terms of number of units of some other currency. It is determined by fiat in a fixed exchange rate regime and by demand and supply for the two currencies in the foreign exchange rate market in a floating rate regime. NEER is a single number (expressed as an index) that expresses the value of domestic currency, in nominal terms, against the whole basket of currencies.
II. Real Effective Exchange Rate (REER) - Real Exchange Rate is that exchange rate which is not affected by inflationary conditions. It is determined by multiplying nominal exchange rate with the price indices of the two countries i.e.
Real Exchange rate, r = i*pf/pd.
Where, i = nominal exchange rate.
pf = price in foreign country.
pd = price in domestic country.
REER is a single number (expressed as an index) that expresses the value of domestic currency, in real terms, against the whole basket of currencies.
III. Fixed Exchange Rate-Fixed Exchange Rate refer to the system under the gold standard where the rate of exchange tends to stabilize around the mint at par value (which means the value of the currency is fixed as per the value of gold of definite weight and fineness).Any large variation of the rate of exchange from the mint par value would entail flow of gold into or from the country. This would have the effect of bringing the exchange rate back to the mint par value.
In present -day situation where gold standard no longer exist, Fixed Exchange Rate refer to maintenance of external value of the currency at a pre-determined level.
