ECONOMIC

capital and the means of putting this capital to its most productive uses.These adjustments are likely to pose severe hardships for some countries, andsome domestic economic difficulties for all nations. The pressures to takeunilateral measures at the expense of one's neighbors could become quiteintense in such an environment. Were just one nation, and then others, topursue such a course, however, the resulting disruption of international tradewould be likely to cause even more serious losses of economic welfare foreveryone. International conferences such as the recently concluded meetingof finance ministers in Rome, and the coming conferences on the world oiland the world food situation, will be useful in the search for cooperativesolutions. At the same time, the international monetary discussions and themultilateral trade negotiations will be indispensable to a broader effort tostrengthen the international framework for managing the increasing numberof economic problems that are of global significance.SUPPLEMENTMeasurement of Effective Changes in Exchange RatesExchange rates between the United States and her trading partners have changedfrequently over the past 3 years. Since such changes vary from currency to currency,it is useful to combine them into a single index number representing the effectivechange in the value of the U.S. dollar. Several methods of computing such a numberhave been developed, but the different methods produce different results. This supplementdiscusses the rationale behind some of the indexes that have been developedand examines the differences in results.Each method of computing the effective change in the value of the dollar combinesindividual changes in exchange rates into a weighted average. The most commonlyused weights are based on bilateral trade shares. The appreciation of the Germanmark, for example, would receive a greater weight than the appreciation of the Frenchfranc because Germany accounts for a larger share of overall U.S. trade.The weights may be computed on the basis of export, import, or total trade shares,depending on the use of the index. The three sets of weights vary because the proportionof U.S. exports that goes to each trading partner will seldom equal the proportionof U.S. imports accounted for by that country. For instance, in 1972 Japan provided16 percent of U.S. imports but purchased only 10 percent of our exports. Theappreciation of the yen would therefore receive a larger weight in an import indexthan it would in an export index. A composite import-export index of the depreciationof the dollar might use weights equal to the sum of bilateral exports and imports as afraction of total U.S. foreign trade.Changes in exchange rates may be expressed in two ways: either as the increasein the value of a foreign currency in terms of dollars or as the decrease in the value ofthe dollar in relation to a foreign currency. The magnitude of the percentage changein each case differs. If the value of the mark expressed in dollars rises by 33 percent,for example, then the value of the dollar expressed in marks falls by only 25 percent.This is true for the same reason that 100 is 33 percent more than 75, but 75 is 25percent less than 100. This confusing arithmetic fact has important implications forthe calculation of these indexes, because the magnitude of the effective change in thevalue of the dollar will depend on how the changes in exchange rates are expressed.An import-weighted index of exchange rate change is normally expressed in termsof the change in the dollar price of foreign currencies. If one assumes that foreign220