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Principles of macroeconomics

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Principles of macroeconomics

Appreciation of a currency is when a country’s currency gains value compared to another. When this happens, the appreciated currency will buy another currency at a lower price. For example, previously one dollar was equivalent to one sterling pound. Today, $0.80 is equivalent to one sterling pound. This is an indication that the dollar has appreciated compared to the sterling pound. Therefore, the dollar has gained value. Due to its high value, the currency will have a higher purchasing power. It will be possible to buy more goods with less money. Appreciation is a benefit to the economy of a country. The exports will be more expensive than before and imports will be cheap. When a currency appreciates, too much it becomes a problem to the country. The money may become scarcer than it should be (Carson, 1999).

Depreciation of a currency happens when a country’s currency loses value in relation to another. A currency that has depreciated will be exchanged at a low price. For instance, yesterday one dollar was equivalent to one sterling pound. Today, one dollar is equivalent to two sterling pounds. This shows that sterling pound has depreciated when compared to the dollar. A currency that has depreciated has less purchasing power. A lot of money will be used to buy few goods. A country’s exports will be less expensive and imports will be expensive. This is a shortcoming to the economy of such a country. A country should impose the necessary monetary measures to control depreciation (Madura, 2009).

Appreciation and depreciation have effects on the foreign exchange market. The effect depends on whether there is an appreciation or depreciation. Appreciation is an advantage to a currency during foreign exchange. It has value compared to another so less money will be used to exchange with another. For instance, if a dollar has more value than the sterling pound, fewer dollars will be used to exchange for sterling pounds. Depreciation is a disadvantage to the affected currency. More money will be used to exchange with another currency. For example, a dollar depreciates in relation to a sterling pound. More dollars will be used to exchange for sterling pounds (Madura, 2009).

References:

Carson, T., & Bonk, M. (1999). Gale encyclopedia of U.S. economic history. Detroit: Gale Group.

Madura, J. (2009). International Financial Management. New York, NY: Cengage Learning.

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