Cambridge International as and a level Economics Ebook

Exchange rate: 
the price of one currency in terms of 
another currency.
KEY TERM
SELF-ASSESSMENT TASK 
4.6
Workers’ remittances made a signifi cant contribution 
to Pakistan’s current account position in 2012. 
Pakistanis working in other countries sent back 
US$13,186 million to their families in that year.
While the country experienced a current account 
defi cit, it had a surplus on its capital account of 
US$220 million and a surplus of US$1,312 million on 
its fi nancial account.
Using the information, calculate:
a
Pakistan’s current account defi cit.
b
Pakistan’ current account position in the absence 
of the workers’ remittances received.
c
Pakistan’s net errors and omissions fi gure.
Credit
Debit
Trade in goods
24,696
40,461
Trade in services
5,035
8,227
Income
826
4,071
Current transfers
17,686
142
Table 4.3 
Pakistan: Current account in US$ millions (2012)
94

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Chapter 4: The macroeconomy 
In practice, a country trades with a number of other 
countries and it is possible that its currency may rise 
in value against some countries while falling against 
others. To gain an impression of the general change in 
a country’s foreign exchange rate, economists measure 
trade weighted exchange rates. A 
trade weighted 
exchange rate 
is a measure, in index form, of the value 
of a currency against a basket of currencies. Th
ese are 
weighted according to the relative importance of the 
countries in the country’s trade. For example, if India 
undertakes three times as much trade with China as it 
does with the US, the Chinese renminbi will be given 
three times as much weight in the calculation as the US 
dollar. A trade weighted exchange rate is also known as a 
multinational exchange rate.
As well as trade weighted exchange rates, economists 
also measure real eff ective exchange rates. A