Reer The Solution

The Real Effective Exchange Rate (REER) is such an index which is inflation adjusted since the inflation in different countries vary. The factors which go into the calculation of the REER are as follows :

the number of countries whose currencies are to be included ( major trading partners)

the weight of each chosen currency in the basket (weight will depend on the trading activity)

the base period when the index is 100

the choice of the measure of inflation (either Wholesale Price Index or Consumer Price Index or some other macroeconomic indicator )

the mathematical formulation (whether the weights to be attached will be arithmetic or geometric weights etc.)