Trade weighted index
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The Trade Weighted Index, also known as the effective exchange rate, is a multilateral real exchange rate which is a weighted average of real exchange rates of Home and Foreign, with the weight for each Foreign country equal to its share in trade. It measures the average price of a Home good relative to the average price of goods of Home trading partners, using the share of trade with each country as the weight for that country.
The Trade Weighted Index is an economic instrument used by economies to compare their exchange rate against those of their major trading partners. Those trading partners that constitute a larger portion of an economy's exports and imports receives a higher index. The point of the trade weighted index is to make a complete comparison between one economy's currency and other currencies it interacts with. It is a much more comprehensive analysis than comparing two currencies, such as the Australian and the US dollar.
