§ Mr. Gould
asked the Chancellor of the Exchequer what are the trade rights given to the United States of America, West Germany, Japan, France and Italy in calculating the effective exchange rate for sterling; to what extent this takes account of tariff changes consequent on British entry into the EEC; and what would be the effective rate between October 1976 and the present if trade in 1976 was used as a weight.
§ Mr. Robert Sheldon
The weights used in calculating the effective exchange rate for sterling are derived from the IMF's Multilateral Exchange Rate Model (MERM). This model uses trade flow data up to 1972 to estimate the effects of exchange rate changes on the prices of imports and exports and the resulting effects on the trade flows between countries. The weights derived from the model thus differ from ones based simply on countries' shares of United Kingdom or world trade. The weights given to the countries requested are as follows:
USA 0.3277 West Germany 0.1314 Japan 0.1150 France 0.1160 Italy 0.0566
They do not take account of the effect of tariff changes consequent on British entry into the EEC.
Calculations using full 1975 trade weights—the latest which are available—show that an effective index on that basis would have increased by 6.3 per cent. between October 1976 and December 1977, compared with an increase of 7.8 per cent. in the effective index using MERM weights. The country coverage for the trade weights is, however, smaller than that for the MERM weights and this, as well as the different weights given to the countries included, influences the result.