Trade Weighted Index (1 Viewer)

[lildoro]

Okay, so I am just a bit confused about the TWI. I understood it when my teacher was explaining it, but now when I'm reading back on it, I'm beginning to confuse myself.

My economics text book defines it as: "A measure of the value of the Australian dollar against a basket of foreign currencies of major trading partners. These currencies are weighted according to their significance to Australia's trade flows".

All this time I thought it was a comparison of the value of $A with other currencies. But how can a comparison be made by a percentage? Actually, what exactly are those percentages in the TWI tables representing? Are they even percentages or something else? Also, what does it mean when the TWI is given as a single figure rather than splitting it up into different countries? (for example in the last row of this table http://www.rba.gov.au/Statistics/exchange_rates.html)

If someone could explain it to me in non-textbooky language, please do so

 

[onlinenooby]

Alrite ill try my best in colloquial.

Basically we have shit coming in and out (M and X). So each country has a different proportion of M and X coming in and out of Australia and to their country. The TWI takes into account how much of trade each country has with China now our largest trading partner.

So, the AUD is the valued against a range of foreign currencies, usually consisting of our 23 largest trading partners, and they are each weighted accordingly to their percentage of trade. So a country with a large % of trade (i.e China as of October 07 had a 15.5%) will have a larger weighting in the TWI.

 

[veloc1ty]

In addition: what it means by giving a country a larger weighting, it means that a change in a higher weighted country's currency will have more of an impact on the TWI itself than a lower weighted country's currency.

E.g. if the Swiss franc plummets, the effects of that on the TWI will barely be felt compared to if the Japanese yen dropped because it is weighted lower, meaning we trade with Sweden far less than Japan and so overall the value change in imports/exports won't be as significant.