Real Exchange Rate and Real Effective Exchange Rate Measurement: Some theoretical Extensions

ABSTRACT The paper has provided theoretical extensions to the computations of nominal effective exchange rate and the real effective exchange rate over time. The extension took cognizance of the common base currency (USD) to which all currencies of the world is usually converted. The paper compared its computations with that of the CBN computations in attempt to provide a litmus test on the extensions. It was observed that the two computations were of preserving order with a very high correlation coefficient between the two computations. However, it was observed that the extensions perform better as it’s reflects more of changes in exchange rate of Nigerian economy. The difference was attributed to the increased in the number of trading partners that was involved in the latter. At the end from the result obtained, the paper recommends that the extension should always be taken into considerations in the computations of effective exchange rate especially for the developing nations like Nigeria; also, Central banks of these countries should endeavour to include as many trading partners as possible into their computations. The paper believes that until this done, their effective rates computations may not reflect the actual changes in the exchange rate of their respective countries.