UPSC Previous Year Question | Prelims GS | 2022

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?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Answer

Correct Answer

1 and 3 only

Explanation

Statement 1 is correct: a rise in NEER reflects rupee appreciation. Statement 2 is incorrect: a rising REER indicates exports becoming costlier and loss of trade competitiveness, not improvement. Statement 3 is correct: higher relative domestic inflation widens the gap between NEER and REER.

Topics: economy, exchange rates, neer and reer, rupee competitiveness