NEER is the exchange rate of the domestic currency vis-à-vis the basket currencies, weighted by the shares of the basket country’s trade in the domestic country’s trade.
On the other hand, REER is a weighted average of nominal exchange rates adjusted for relative price differential between the domestic and foreign countries, based upon the purchasing power parity (PPP) hypothesis. It is nominal exchange rate multiplied by relative price indices of two countries. The REER takes into account the relative inflation levels in two economies and thus incorporates the concept of purchasing power.
