One way to gauge the general value of one currency relative to other currencies is to calculate the trade-weighted exchange rate, which is an index number similar to the consumer price index. The trade-weighted exchange rate for the U.S. dollar weights each individual exchange rate by the share of that country's trade with the United States. Go to the Web site of the Federal Reserve Bank of St. Louis (FRED) (research.stlouisfed.org/fred2/) and download monthly data on the trade weighted exchange rate for the U.S. dollar against major currencies (TWEXMMTH) from 1973 to the present.
a. What has been the long-term trend in the exchange value of the dollar? What effect should changes in the exchange rate during this period have had on U.S. net exports? Briefly explain.
b. What has been the trend in the exchange value of the dollar over the past year? What effect should changes in the exchange rate during the past year have had on U.S. net exports? Briefly explain.