|CPI, NEER and REER TIMOR LESTE WITH TRADING PARTNER
The price of one currency in
terms of another is called exchange rate. Exchange rates play
a central role in international trade because they allow the
computation of the relative prices of goods and services
produced in different countries thereby allowing the
comparison of those prices across countries. Changes in
exchange rates are described either as depreciations or
appreciations. Real exchange rates are nominal exchange rates
corrected somehow by the effect of price movements (increase
or decrease) in the economy. Real exchange rates are defined
in terms of nominal exchange rates and price levels. The real
exchange rate provides information on the degree of
competitiveness of one country when compared to another. For
example, the real exchange of the US dollar against the
Indonesian rupiah provides information on the competitiveness
of the Timorese economy compared to Indonesia. In this case, a
decline in the real dollar/rupiah exchange rate (which is
called a real appreciation of the dollar against the rupiah)
would mean a decline in the purchasing power of the rupiah in
Timor Leste and therefore a loss in competitiveness for Timor
Leste vis-à-vis Indonesia. Conversely, an increase in real
dollar/rupiah exchange rate (called real depreciation of the
dollar against the rupiah) would mean an increase in the
purchasing power of the rupiah in Timor Leste and therefore a
gain in competitiveness for Timor Leste vis-à-vis Indonesia.
indicator to measure exchange rate changes is the Nominal
Effective Exchange Rate (NEER) and Real Effective Exchange Rate
is a weighted average of major bilateral nominal exchange rates,
with weights based on the trade shares reflecting the relative
importance of each currency in the effective exchange rate
basket. The REER is obtained by adjusting the NEER for inflation
differentials with the countries whose currencies are included
in the basket. As the inflation rate in each country is assumed
to broadly indicate the trends in domestic cost of production,
the REER is expected to reflect foreign competitiveness of
domestic products. The main focus of the REER is on the trade
balance, particularly on the exchange rate induced changes in
trade flows. A trend appreciation of the real effective exchange
rate is considered unfavorable for the growth of exports and as
it favors imports from competing countries.
graph of RER TL vis a vis Indonesia and Australia
reveal the current situation with trading partners
Calculation, Sources and Methodology
and REER based on trade composition with 8 trading partner
countries are computed on a regular basis by the Central Bank (BCTL).
for each time period t is defined as the weighted sum of the
bilateral nominal exchange rates, with weights defined as share
of external trade of each trade partner on total.
Exchange rates of country/currency i against the US
Weights attached to the country/ currency i in the index
is the weighted sum of bilateral real exchange rates, with
weights given by the share of each trading partner total:
j = Timor-Leste ,
countries in the basket is based on bilateral trade shares and
the importance in terms of competitiveness of those countries
import to Timor-Leste in the international market.
selected for the trading partner are; Thailand bath, Indonesia
Rupiah, Portugal Euro, Malaysian Ringgit, Singapore Dollar,
Japanese Yen, and Australian Dollar. The exchange rate of each
country is collected from the official reference rate released
by Bloomberg website, except Vietnamese Dong by Oanda, which is
equal to a monthly average of actual exchange rate.
value is calculated on basis of geometric average of Timor-Leste
bilateral trade with each of the countries.
composition (2001=100) percent: Indonesia is 57, Australia 21,
Singapore 16, Portugal 4 and Malaysia 2.
2006 the trading partner is changed to the following composition
(percent): Indonesia 45, Australia 17, Singapore 17, Japan 7,
Vietnam 5, Thailand 4, Malaysia 3 and Portugal 2.
The data source
is from the
National Statistics Department. If
the current years weighted value necessary for computation is
unavailable, hence, preliminary estimates are calculated using
the weighted values of the previous year. After the current year
trade data becomes available, the preliminary rates are revised.
Search database by Month & Year.