Question

Consider the following information on Mexico's trade. Thirty percent of the trade is conducted with country A, 55% of trade with country B, and 15% of trade with country C. If the peso appreciates 10% against country A, depreciates 30% against country B, and depreciates 10% against country C, then the effective trade-weighted real exchange rate experiences a:

Answer 1

15% depreciation

Step-by-step explanation:

the increase/decrease in the effective trade-weighted real exchange rate = (change in the exchange rate with country A x trade weight of country A) + (change in the exchange rate with country B x trade weight of country B) + (change in the exchange rate with country C x trade weight of country C) = (35% x 10%) + (55% x -30%) + (15% x -10%) = 3.5% -16.5% -1.5% = -15% or 15% depreciation

Every time we need to calculate the weighted effect on anything, we must multiply the individual effects by the their specific weight, and then add all the individual results.

In this case, we are measuring the sum of the effects of different changes in the value of the Mexican peso against foreign currencies. In general, the Mexican peso appreciated against one currency but depreciated against two others, but the overall effect is a 15% depreciation.