ECONOMIC

exporters do not alter their prices, expressed in their own currency, then changes inthe dollar value of foreign currencies accurately reflect the changes in dollar pricesto American importers. Likewise, an export-weighted index is usually based on changesin the foreign currency prices of dollars, because changes in the value of the dollarreflect changes in prices to foreign purchasers if American exporters hold their dollarprices constant.Selection of the countries to be included in the computation can markedly affectthe value of the index. For completeness one might wish to include as many countriesas possible in the sample, but because some countries account for only a small shareof overall U.S. trade, limiting the sample to major U.S. trading partners should notsignificantly affect the value of the index. If a major trading partner were to beeliminated from the sample, however, the resulting index might not accuratelyreflect the effective depreciation of the dollar.Bilateral trade shares of the United States have been shifting in the last 3 yearsin response to changes in exchange rates, further relaxation of trade barriers, andcrop failures abroad. An index of the effective depreciation of the dollar couldtherefore be sensitive to the choice of the year for which bilateral trade shares arecomputed. In some cases, however, it is difficult to predict how these changes willaffect trade shares. For instance, the depreciation of the dollar in relation to thecurrency of a trading partner should stimulate U.S. exports to that country but reduceU.S. imports from that country. Because these two results tend to offset each other,the net effect on total trade shares is uncertain.Changes in exchange rates are computed in relation to the exchange rates in effecton some base date. Commonly used base dates include these: May 1970, the lastmonth in which all major U.S. trading partners observed fixed exchange rate policiesfor their currencies; December 18, 1971, the day of the Smithsonian Agreement;and March 19, 1973, the first day of the float against the dollar for a number of foreigncurrencies. Because the value of the dollar generally declined from May 1970to July 1973, indexes of effective depreciation of the dollar using an earlier base datefor exchange rates will generally show a greater depreciation of the dollar than thosebased on a more recent date. Typical spot rates used are the daily noon spot ratesquoted in New York or London.The Change in the Value of the Dollar: A Comparison of Several IndexesTwo widely used indexes are the Morgan Guaranty index of effective exchangerate changes, published by the Morgan Guaranty Trust Company, and the ReutersCurrency Index, computed by Reuters, Limited, the London-based international newsagency. Both are composite indexes, combining bilateral export and import tradeshares in one index, but different techniques are used to compute them.The Morgan Guaranty index uses a sample of 14 countries other than the UnitedStates, which together accounted for about two-thirds of total U.S. trade in 1972.*Using separate export and import trade shares computed from 1972 trade data (beforeSeptember 1973, trade data for 1971 were used), Morgan Guaranty first computesseparate export and import indexes and then averages the two results accordingto the relative weights of exports to and imports from the other 14 countriesin the sample. The export-weighted changes in the values of foreign currencies areexpressed in foreign currency units per dollar; the import-weighted changes areexpressed in dollars per foreign currency unit. Spot exchange rates are the daily noondollar bid rates quoted in New York.The Reuters Currency Index, which is followed closely by foreign central banksand foreign exchange markets, uses a sample comprising nine countries, eliminating*The countries are: Canada, Japan, the United Kingdom, West Germany, France, Italy,Belgium-Luxembourg, the Netherlands, Switzerland, Austria, Denmark, Norway, Sweden,and Australia.527-867 O - 74 - 15221