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Macroeconomics

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Calculating an Effective Exchange Rate

MACRO-ZM2E@L

An effective exchange rate is a weighted index of the values of the exchange rates for a country. The effective exchange rate is usually defined as a way to measure the relative value of the home currency, that is baskets of foreign currencies per 1 unit of home currency.

Most often the weights are based on the volume of trade with the country's major trading partners. Use the following data to construct an effective exchange rate index for the U.S. in 2016, using the year 2000 as the base year.

The Euro

  • 2000 exchange rate: \$0.91 per euro
  • 2016 exchange rate: \$1.14 per euro
  • Trade weight: 30%

Canadian dollar

  • 2000 exchange rate: \$0.68 per Canadian \$
  • 2016 exchange rate: \$0.76 per Canadian \$
  • Trade weight: 50%

British pound

  • 2000 exchange rate: \$1.55 per pound
  • 2016 exchange rate: \$1.41 per pound
  • Trade weight: 20%