Impact of exchange rates on the International Trade price indexes

The Import Price Index and Export Price Index employ the use of exchange rates where the contractual currencies of transactions are recorded in currencies other than Australian dollars. While a proportion of Australia’s international trade is conducted in Australian dollars, those that are traded in foreign currencies require conversion to Australian dollars. Hence changes in the relative value of the Australian dollar against overseas currencies (in particular, the major trading currencies such as the United States dollar, Japanese yen, Pound sterling and Euro) has a direct impact on the price of  products purchased or sold in foreign currencies. That is, when the Australian dollar appreciates, it buys more foreign currency, and the price of the product in Australian dollars falls. Conversely, when the Australian Dollar depreciates, it buys less foreign currency and price of the product in Australian dollars rises.

Example:

Consider a transaction undertaken in US dollars.  Assume that the transaction is $200 USD in both September and December.

If the exchange rate in September is 0.75 (that is, 1 Australian dollar buys 0.75 US dollars, or 75 US cents), the $200 USD transaction equates to:

AUD price = USD price / (USD per AUD exchange rate)

                 = $200 USD / (0.75 USD per 1 AUD)

                 = $266.67 AUD

If the exchange rate in December is 0.80 (that is, 1 Australian dollar buys 0.80 US dollars, or 80 US cents), then we say that the "dollar has appreciated", and the $200 USD transaction equates to:

AUD price = USD price / (USD per AUD exchange rate)

                 = $200 USD / (0.80 USD per 1 AUD)

                 = $250.00 AUD

The Australian dollar price has fallen from $266.67 to $250, or a fall of 6.25%