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Calculate the trade-weighted effective exchange rate

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Question - Assume that Australia trades mostly with two countries only, the United States and the United Kingdom, and that 65% of the trade is conducted with the United States, 30% with the United Kingdom, and 5% with the rest of the world.

The exchange rates of the Australian dollar at two points in time, 0 and 1, are as follows:

Exchange Rate

time 0

time 1

AUD/USD

1.4541

1.7800

AUD/GBP

2.1555

2.5700

Required -

(a) Calculate the exchange rates in indirect quotation from an Australian perspective.

(b) Calculate the percentage rates of depreciation or appreciation of the Australian dollar against the two currencies. Comment on your results.

(c) Calculate the exchange rate relatives, using 0 as a base period, and the base value = 100

(d) Calculate an unweighted effective exchange rate index, using 0 as a base period in which the index assumes the value of 100.

(e) Calculate the normalized trade weights.

(f) Calculate the trade-weighted effective exchange rate index using geometric approach, and explain the result with reference to the Australian dollar.

Reference no: EM132549951

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