MOVEMENT OF EXCHANGE RATES (05:06 PM)We use two sets of terms to denote movement in XR-appreciation/depreciation(A/D), and revaluation/devaluation(Re/Dev).Both A and R as well as D and Dev, respectively denote the same direction of movement R means that a currency has become expensive, and D and Dev mean the currency has become cheaper.The difference is that A/D is used in a floating XRS, whereas revaluation. devaluation is used in fixed XRS.If the currency is not specified, then the movement denotes the movement in domestic currency.USE/PURPOSE OF EXCHANGE RATES (05:21 PM)Exchange rates donot merely facilitate trade and enable the quoting of prices in different currencies. rather they help to determine the direction of trade as well through trade competitiveness.NOMINAL EXCHANGE RATE (NER)One dollar=80 rupees.The price quoted on the market actual value at which the conversion occurs.REAL EXCHANGE RATE (RER)RER=NER.P*/P, where NER=Direct quote exchange rate.p*=Price level in a foreign country.p=price level in the home country.The RER of the rupee is expensive as compared to the NER of the rupee.RER is the inflation-adjusted exchange rate.RER is used to visualise whether the current nominal exchange rate is competitive or not after incorporating the effect of inflation.If the currency's value in nominal terms does not change but the inflation in the country becomes higher, then the country loses its trade competitiveness despite no change in NER. This is because the country's currency becomes expensive in real terms i.e. its RER appreciates example-In the above scenario NER is 1$= Rs.80, whereas RER becomes 1$=Rs.75.The implication is that for the country to restore its competitiveness, Its NER should depreciate. For example: In the future rupee depreciates from 1$=Rs 80 to 1$=Rs 90, then the RER would be 90*110/120 approximately equal to Rs 80,i.e. our trade competitiveness would have been restored to the same level as when our NER was Rs 80, and we did not have higher inflation.EFFECTIVE EXCHANGE RATES (06:30 PM)EERs are a way to visualise how a currency's value changes with respect to a basket of currencies, not just one currency.EERs represent the exchange rate that a currency would have with the rest of the world taken together.A country trades with multiple countries and in multiple currencies, and each of these currencies moves independently with respect to the home currency. Thus the home currency may appreciate against a few and depreciate against the others. We calculate weighted average exchange rates against a basket of currencies to visualise overall competitiveness.The weights are the proportion of trade a country has with each other.Please refer to the formula written in the class.*RBI uses the IMF formula to calculate NEER and REER, there are two sets of six currency baskets (Constituting around 80% of total trade), and a 40 currency basket constituting around 95% of total trade.*A base period is chosen, indirect quoted exchange rates are used, and the EER value is indexed to 100 for this period and is subsequently trapped.*An increase in the value of NEER or REER signifies appreciation of the rupee and hence signifies that export may become uncompetitive i.e.rupee has been said to become overvalued

MOVEMENT OF EXCHANGE RATES (05:06 PM)We use two sets of terms to denote movement in XR-appreciation/depreciation(A/D), and revaluation/devaluation(Re/Dev).Both A and R as well as D and Dev, respectively denote the same direction of movement R means that a currency has become expensive, and D and Dev mean the currency has become cheaper.The difference is that A/D is used in a floating XRS, whereas revaluation. devaluation is used in fixed XRS.If the currency is not specified, then the movement denotes the movement in domestic currency.USE/PURPOSE OF EXCHANGE RATES (05:21 PM)Exchange rates donot merely facilitate trade and enable the quoting of prices in different currencies. rather they help to determine the direction of trade as well through trade competitiveness.NOMINAL EXCHANGE RATE (NER)One dollar=80 rupees.The price quoted on the market actual value at which the conversion occurs.REAL EXCHANGE RATE (RER)RER=NER.P*/P, where NER=Direct quote exchange rate.p*=Price level in a foreign country.p=price level in the home country.The RER of the rupee is expensive as compared to the NER of the rupee.RER is the inflation-adjusted exchange rate.RER is used to visualise whether the current nominal exchange rate is competitive or not after incorporating the effect of inflation.If the currency's value in nominal terms does not change but the inflation in the country becomes higher, then the country loses its trade competitiveness despite no change in NER. This is because the country's currency becomes expensive in real terms i.e. its RER appreciates example-In the above scenario NER is 1$= Rs.80, whereas RER becomes 1$=Rs.75.The implication is that for the country to restore its competitiveness, Its NER should depreciate. For example: In the future rupee depreciates from 1$=Rs 80 to 1$=Rs 90, then the RER would be 90*110/120 approximately equal to Rs 80,i.e. our trade competitiveness would have been restored to the same level as when our NER was Rs 80, and we did not have higher inflation.EFFECTIVE EXCHANGE RATES (06:30 PM)EERs are a way to visualise how a currency's value changes with respect to a basket of currencies, not just one currency.EERs represent the exchange rate that a currency would have with the rest of the world taken together.A country trades with multiple countries and in multiple currencies, and each of these currencies moves independently with respect to the home currency. Thus the home currency may appreciate against a few and depreciate against the others. We calculate weighted average exchange rates against a basket of currencies to visualise overall competitiveness.The weights are the proportion of trade a country has with each other.Please refer to the formula written in the class.*RBI uses the IMF formula to calculate NEER and REER, there are two sets of six currency baskets (Constituting around 80% of total trade), and a 40 currency basket constituting around 95% of total trade.*A base period is chosen, indirect quoted exchange rates are used, and the EER value is indexed to 100 for this period and is subsequently trapped.*An increase in the value of NEER or REER signifies appreciation of the rupee and hence signifies that export may become uncompetitive i.e.rupee has been said to become overvalued