Trade-weighted effective exchange rate index

Depending on the purpose for which it is used, it can be export-weighted, import-weighted, or total-external trade weighted.

By design, movements in the currencies of those trading partners with a greater share in an economy's exports and imports will have a greater effect on the effective exchange rate.

The use of trade weights in a globalized economy is potentially misleading, because the amount of value added content in exports destined for a country may deviate significantly from the gross value of exports shipped to that country.

The interpretation of the effective exchange rate is that if the index rises, other things being equal, the purchasing power of that currency also rises (the currency strengthened against those of the country's or area's trading partners).

To account for all effects of relative inflation rates, the real effective exchange rate index is compiled as the product of the effective exchange rate index and the relative price index between the home economy and the trading partners.