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## Some Other Important Concepts of foreign Exchange Rates

DOWNLOAD FAKE PRANK PAYTM PAYMENT GENRATOR APP Some Other Important Concepts of Exchange Rates In forex markets, we are mainly concerned with nominal exchange rates. However, for analysis purposes it is not sufficient to consider the nominal exchange rates alone. There are other concepts of exchange rates which are being used through out the literature

## Some Other Important Concepts of foreign Exchange Rates

July 27, 2022 by pritamkurrey111

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Some Other Important Concepts of Exchange Rates

In forex markets, we are mainly concerned with nominal exchange rates. However, for analysis purposes it is not sufficient to consider the nominal exchange rates alone.

There are other concepts of exchange rates which are being used through out the literature on exchange rate by economists. The most important concepts of exchange rates that economists use are:

1.Real Exchange Rate(RER)

2.Nominal Effective Exchange Rate(NEER)

3.Real Effective Exchange Rate(REER)

4.Equilibrium Real Exchange Rate (ERER)

5.Natural Real Effective Exchange Rate (NATREX)

Real Exchange Rate (RER)- This concept adjusts

nominal exchange rate for relative prices in the economies of the currencies involved. This exchange rate is given as:

Real Exchange Rate = S(Rs./S) (PS /pRs)

Where

S(Rs./$) = Spot Nominal Exchange Rate, pS = For-

eign Price level and pRs = domestic price level.

Thus, we know that when nominal exchange rate is multiplied by relative price levels of the two countries, we get real exchange rate. This exchange rate actually refers to the change in the real purchasing power of a currency relative to its past purchasing power in relation to a foreign currency.

Nominal Effective Exchange Rate (NEER)- The ba-

sic critique of export promotion policies through incentives or import substitution is that, such a regime provides incentive to inefficiencies to the production systems. Since the system is inefficient therefore it is not possible for the producers to enter the international markets. To make these companies enter the international markets, incentives to exports are provided. When we add this per unit incentive to

Rate.

the nominal exchange rate we get Nominal Effective Exchange

This concept is being used by economists. This is known as nominal effective exchange rate as opposed to nominal exchange rate and the real exchange rate. For example, the official exchange rate is Rs. 25/$ and

each dollar earned gets 10% subsidy from the state in one

shape or the other, then the effective exchange rate is: Nominal exchange rate + per unit subsidy, i.e., Rs. 25 + 10% of Rs.

25 = Rs. 25+ Rs. 2.5 = Rs. 27.5 In this way the nominal effective exchange rate is calculated.

Real Effective Exchange Rate (REER)- The Real Ef-

fective Exchange Rate is again a relative price adjusted ef-

fective exchange rate. When Nominal Effective Exchange

Rate is adjusted for relative prices, the Real Effective Ex-

change Rate is obtained. This is defined as:

REER = NEER (P Where again pl

= Foreign Price level and

pd

= domestic price level.

Equilibrium Real Exchange Rate- It is that relative

price of tradable goods to non-tradable goods that for given sustainable equilibrium values of other relevant variables such as taxes, international prices and technology, results in the simultaneous attainment of internal and external equilibrium. Internal equilibrium means that the market for nontradable (the goods which are not internationally traded) goods clears. External equilibrium, on the other hand is attained when current account is balanced. According to Edwards, this equilibrium exchange rate is determined by real and fundamental factory.

NATREX- It is the acronym for Natural Real Ex-

change, referring to a medium fun inter cyclical equilibrium real exchange rate, determined by real and fundamental factors. Importantly, the NATREX is a moving equilibrium real exchange rate, responding to continual changes in exogenous and endogenous real fundamentals.

Indian Forex-Market, its Structure

and Exchange Rate Fixation

In India the quotes appear in all the newspapers.

These rates pertain to a bank (the source is always given with the quotes). The banks quote a spectrum of rates because it works as agent of its customers as well.

when a customer reaches a bank with a cheque or sight draft or time draft, the banks quote for all types of transactions with immediate payments or for transactions involving some service (time drafts). In this section we shall be discussing these quotes. This section also deals with the issue of fixing different types of exchange rates, where agency function of the banks are involved.

Structure of Exchange Rates In Indian Forex Market -In Indian forex market not all the currencies are bought or sold. For the currencies which are not frequently traded in Indian forex market, the banks use London or New York or Singapore Markets. From these rates, the cross rates are calculated and the rates are quoted keeping in view the comparative business environment prevailing in these markets.

In fact, authorised dealers (ADs) face, two types of transactions: (i) Clean instruments (known telegraphic transfers (TT), and (ii) Payment against collection (BC, i.e.,bill for collection) of documents. In the second category of trans actions, the ADs have to provide more services therefore the two rates have to be different. While fixing the exchange rate for a transaction ADs must consider three aspects:

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