difference between depreciation and appreciation of currency pdf

Difference Between Depreciation And Appreciation Of Currency Pdf

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Depreciation and devaluation are two economic events that deal with the value of your country's currency. Both of these situations cause the value of your currency to drop versus the rest of the world.

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Open Economy Macroeconomics

Currency Depreciation refers to decrease in the value of domestic currency in terms of foreign currency. It makes the domestic currency less valuable and more of it is required to buy the foreign currency. It means, with same amount of dollars, more goods can be purchased from India, i. Currency Appreciation refers to increase in the value of domestic currency in terms of foreign currency. The domestic currency becomes more valuable and less of it is required to buy the foreign currency. For example:.

Currencies appreciate against each other for a variety of reasons, including government policy, interest rates, trade balances, and business cycles. In a floating rate exchange system, the value of a currency constantly changes based on supply and demand in the forex market. The fluctuation in values allows traders and firms to increase or decrease their holdings and profit off them. Currency appreciation, however, is different from the increase in value for securities. Currencies are traded in pairs. Thus, a currency appreciates when the value of one goes up in comparison to the other. Typically, a forex trader trades a currency pair in the hopes of currency appreciation of the base currency against the counter currency.

Currency Appreciation

Autonomous Items in BOP- Autonomous items refer to international economic transactions that take place due to some economic motives like earning income and profit maximisation. BOP is in deficit if the autonomous receipts are less than autonomous payments. BOP is in surplus if the autonomous receipts are greater than autonomous payments. Accommodating Items in BOP- Accommodating items refers to those international economic transactions that are not undertaken with the motive of earning profit such as government financing, injection or withdrawal from the official reserves. Such transactions are undertaken as a consequence of the autonomous transactions. In other words, they are compensating short-term capital transactions that are undertaken to correct the disequilibrium in the autonomous items.


Currency Depreciation refers to decrease in the value of domestic currency in terms of foreign currency. It makes the domestic currency less valuable and more of it.


The Vicious Circle of Inflation and Depreciation

In finance and accounting, terminology is everything. Depreciation and appreciation are two sides of the same coin. Depreciation is when the value of assets goes down, and appreciation is when the value of assets goes up. Another type of depreciation that can confuse people is asset depreciation. This is an accounting term used to describe a certain type of write-off.

Differentiate between devaluation and depreciation.

The Vicious Circle of Inflation and Depreciation

The increasing frequency of interacting episodes of inflation and depreciation in many industrial countries since the adoption of floating exchange rates has prompted the concern that exchange-rate flexibility is liable to cause vicious or alternatively, virtuous circles. The vicious circle hypothesis states that a floating exchange-rate regime, in allowing a higher rate of domestic inflation than prevailing abroad, could set in motion a cumulative, self-reinforcing process leading to a vicious circle between currency depreciation and inflation. It is argued that exchange-rate fluctuations, arising from real or monetary causes, could sponsor disequilibrating changes in domestic costs, wages and prices which, in turn, are apt to induce further changes in the exchange rate. A depreciation of the domestic currency initially aggravates the rate of domestic price inflation through an immediate rise in the price of traded goods expressed in domestic currency, which is quickly fed into the domestic price level. This inflation, in turn, requires a depreciation of the exchange rate, which causes further inflation.

For example. Exports cheaper. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports. Also, after a devaluation, UK assets become more attractive; for example, a devaluation in the Pound can make UK property appear cheaper to foreigners. Imports more expensive. A devaluation means imports, such as petrol, food and raw materials will become more expensive.

Economic effect of a devaluation of the currency

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Difference between Currency Depreciation and Currency Appreciation

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Difference Between Appreciation & Depreciation

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