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:
A) 15% appreciation.
B) 15% depreciation.
C) 25% depreciation.
D) 20% appreciation.

Question

Quizplus · Accepted Answer

The effective trade-weighted real exchange rate is calculated as a weighted average of the relative exchange rates between the peso and the countries involved in the trade. The weights are the percentages of trade conducted with each country, namely 30% for A, 55% for B, and 15% for C. 
The change in the exchange rate with each country (given in the problem) is multiplied by the corresponding weight and then they are all summed up. 
So, the effective exchange rate change can be calculated as: 
(0.3 x 10%) + (0.55 x -30%) + (0.15 x -10%) = -15%
This means that the effective exchange rate depreciates by 15%. Therefore, the answer is B, 15% depreciation.

Consider the Following Information on Mexico's Trade