What is a trade weighted index?

A trade weighted index is indeed a method to measure the value of a currency, in this case, the Australian dollar ($A), against a basket of other currencies that are weighted by the amount of trade that a country conducts with those nations. The weights reflect the relative importance of each trading partner in terms of trade volume; this means that currencies from countries with which Australia trades most heavily have a greater influence on the index than those from less significant trading partners.

This measurement is particularly important for understanding the strength of a currency in international markets, as it allows for a more nuanced view of currency value that takes into account trade relationships rather than merely comparing against a single foreign currency. Thus, fluctuations in the trade weighted index can provide insights into the competitive position of the Australian economy and its relative health in global trade contexts.

The other options do not accurately define a trade weighted index. For instance, measuring total imports and exports does not take into account the relative importance of different currencies, and a gauge of inflation across multiple countries does not directly relate to currency valuation in the context of trade. Similarly, net foreign investments are more related to capital flows than to the currency's performance as reflected in a trade weighted index.