Time to revise the TWI to reflect modern New Zealand’s export profile

24 Feb 2014

Headline exchange rate measures don’t capture New Zealand's burgeoning emerging market trade, particularly the China-driven export boom, argues this short paper.


People are worried about the damage the strengthening exchange rate might be doing to the export sector. It's only a matter of time before there are more ill-advised calls for exchange rate interventions.

Most economists use the Reserve Bank of New Zealand’s Trade-Weighted Index (TWI-5) exchange rate measure to understand the impact of the exchange rate on the economy since it is widely reported.1 But this measure reflects old trading patterns, as it puts a lot of weight on the exchange rate with 5 markets – Australia, Japan, the Euro area, the UK and the US – selected because of their historical market size. Nor does the TWI-5 capture services trade.

However, it is now the emerging markets – particularly China – that drive our export growth. Goods exports to China are booming, clocking in at almost $10 billion in 2013. Services exports are also growing in importance. China’s blossoming middle classes are on the move, generating a $732 million windfall for New Zealand tourism operators in 2013.

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