UPSC Prelims 2022 · Question 2 of 98
UPSC Prelims 2022 question on Nominal Effective Exchange Rate
- ExamUPSC CSE
- Year2022
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicExternal Sector of India
- DifficultyMedium
- TypeStatement
With reference to the Indian economy, consider the following statements:
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct?
Show answer
Answer: C. 1 and 3 only
Verdict
Correct statements: 1 and 3 → Option (c).
Statement by statement
Statement 1 – CORRECT: An increase in NEER indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners.
Statement 2 – INCORRECT: An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a LOSS in trade competitiveness, not an improvement.
Statement 3 – CORRECT: REER is NEER adjusted for relative inflation. If inflation in the domestic nation is rising relative to inflation in other countries, there is likely to be an increasing divergence between NEER and REER.