Which of the following statements are correct about the Real Effective Exchange Rate (REER)?

1. The REER is the weighted average of a country’s currency in relation to an index or basket of other major currencies.

2. The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index.

3. An increase in REER implies that exports become cheaper and imports become expensive.

Select the correct answer using the code given below:

• The Real Effective Exchange Rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies. The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index.

• This exchange rate is used to determine an individual country’s currency value relative to the other major currencies in the index.

• REER is used to measure the value of a specific currency in relation to an average group of major currencies. A country’s REER is an important measure when assessing its trade capabilities.

• The REER can be used to measure the equilibrium value of a country’s currency, identify the underlying factors of a country’s trade flow and analyze the impact that other factors, such as competition and technological changes, have on a country and ultimately, the trade-weighted index.

• For example, if the U.S. dollar exchange rate weakened against the euro, U.S. exports to Europe become cheaper. European businesses or consumers buying U.S. goods need to convert their euros to dollars to buy our exports. If the dollar is weaker than the euro, it means the Europeans can get more dollars for each euro. As a result, U.S. goods are cheaper solely due to the exchange rate between the euro and the U.S. dollar.

Note: An increase in REER implies that exports become more expensive and imports become cheaper. Therefore, an increase indicates a loss in trade competitiveness.