Exchange Rates - IB Economics
EXCHANGE RATES
The exchange rate is the price of one country’s currency in terms of another country’s currency
Quoted exchange rates can be either direct or indirect,
Direct: home currency per unit of foreign currency
39 Rupees per US Dollars 80 Rupees per Pound
Indirect: foreign currency per unit of home currency
0.0255102 US Dollar per Indian Rupee 0.491594 Pound per Indian Rupee
Appreciation of Currency Currency Appreciation means that the given currency has become more valuable with respect to another currency.
For example if the rupee appreciates it means that rupee has become more valuable in relation to dollar.
In case of appreciation a "downward" movement takes place. For instance if the rupee moves downwards from 42 per dollar to 39 per dollar then rupee is said to appreciate.
Appreciation make Indian goods expensive for foreigners and make foreign goods cheaper
Appreciation leads to unfavorable Balance of Payments
Depreciation of a currency
Currency Depreciation means that the given currency has become less valuable with respect to another currency.
A depreciation of the local currency means that it takes more local currency to buy a unit of foreign currency
A depreciation of a country’s currency makes its goods cheaper for foreigners and makes foreign goods more expensive.
Depreciation leads to favorable BOP
Factors affecting exchange rates (floating exchange rate )
Exchange rate of a country appreciates if the demand of that country’s currency increases or if there is a shortage in supply
Exchange rate of a country depreciates if the demand of that country’s currency decreases or if there is an increase in supply
1. A change in income
If a country’s national income increases then its demand for imports will increase and supply of its currency increase
ER depreciates when supply increases
If foreign income rises(US GDP rises), demand
The exchange rate is the price of one country’s currency in terms of another country’s currency
Quoted exchange rates can be either direct or indirect,
Direct: home currency per unit of foreign currency
39 Rupees per US Dollars 80 Rupees per Pound
Indirect: foreign currency per unit of home currency
0.0255102 US Dollar per Indian Rupee 0.491594 Pound per Indian Rupee
Appreciation of Currency Currency Appreciation means that the given currency has become more valuable with respect to another currency.
For example if the rupee appreciates it means that rupee has become more valuable in relation to dollar.
In case of appreciation a "downward" movement takes place. For instance if the rupee moves downwards from 42 per dollar to 39 per dollar then rupee is said to appreciate.
Appreciation make Indian goods expensive for foreigners and make foreign goods cheaper
Appreciation leads to unfavorable Balance of Payments
Depreciation of a currency
Currency Depreciation means that the given currency has become less valuable with respect to another currency.
A depreciation of the local currency means that it takes more local currency to buy a unit of foreign currency
A depreciation of a country’s currency makes its goods cheaper for foreigners and makes foreign goods more expensive.
Depreciation leads to favorable BOP
Factors affecting exchange rates (floating exchange rate )
Exchange rate of a country appreciates if the demand of that country’s currency increases or if there is a shortage in supply
Exchange rate of a country depreciates if the demand of that country’s currency decreases or if there is an increase in supply
1. A change in income
If a country’s national income increases then its demand for imports will increase and supply of its currency increase
ER depreciates when supply increases
If foreign income rises(US GDP rises), demand