Country x conducts 60% of its trade with country y and 40% of its trade with country z. The initial value of the trade-weighted exchange rate index of country x is 100. What will be its new trade-weighted exchange rate index value if its currency falls in value by 20% against the currency of country y and rises by 10% against the currency of country z?
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Answer:
92
Explanation:
When the value of X's currency falls by 20% against the currency of Y, and X conducts 60% of its trade with Y, this changes the component of the exchange rate index contributed by Y to 0.6*(1-0.2) = 0.6*0.8 = 0.48. The value of X's currency rises against the currency of Z by 10% and it conducts 40% of its trade with Z. This changes the value of the component of the exchange rate index contributed by Z to 0.4*(1+0.1) = 0.44 .
Adding the two components gives 0.48 + 0.42 = 0.92
The exchange rate index was initially at 100. It is now changed to 100*0.92 = 92.
The answer is not 25. The new trade weighted exchange rate index value is 92.
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