Specifically, the effective exchange rate basket should have a variety of currencies to reflect diversification of trade and investment. The weight is to be determined based on the current account situation and the currency structure of capital and financial account and of cross-border receipt and payment. The reference of a basket of currencies is reasonable in theory.
In practice, however, the nominal effective exchange rate, which is not inflation-adjusted, is more frequently used, for the following reasons: First, it is hard to settle on a universally accepted and comparable price index. Though commonly used, the CPI may not be appropriate according to academicians as it includes prices of many non-tradables.