Studies examining the effect of currency appreciation and depreciation on the trade balance should be based on:
A) the nominal effective exchange rate
B) the real effective exchange rate
C) the nominal bilateral exchange rate of the country's largest trading partner
D) the real bilateral index of the currency of the country's largest trading partner

Question

Quizplus · Accepted Answer

The real effective exchange rate (REER) is the most comprehensive measure because it adjusts for price level differences between countries (making it "real") and takes into account the trade-weighted average of a country's currency relative to an index or basket of other major currencies (making it "effective"), thus providing a more accurate picture of the currency's overall external value and its impact on trade balance.

Studies Examining the Effect of Currency Appreciation and Depreciation on the Trade