Effective exchange rate

The effective exchange rate is an index that describes the strength of a currency relative to a basket of other currencies. Suppose a country has trading partners and denote and as the trade and exchange rate with country respectively. Then the effective exchange rate is calculated as: EER are still volatile over short periods of time and a poor guide for comparing standards of living across countries. For that purpose Purchasing Power Parity measures are more appropriate.

Effective exchange rate

The effective exchange rate is an index that describes the strength of a currency relative to a basket of other currencies. Suppose a country has trading partners and denote and as the trade and exchange rate with country respectively. Then the effective exchange rate is calculated as: EER are still volatile over short periods of time and a poor guide for comparing standards of living across countries. For that purpose Purchasing Power Parity measures are more appropriate.