What is currency appreciation? What is currency depreciation?

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What is currency appreciation? What is currency depreciation?

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What is currency appreciation? What is currency depreciation?

Explanation & AnswerSolution by a verified expert

Explanation

The bilateral trade and investment between the countries determine the exchange rate. The changing quantum of trade may appreciate or depreciate the value of home currency in terms of foreign currencies.
 
When the value of a currency increases in relation to other currencies, it is termed as currency appreciation. In simple terms, due to appreciation, a currency can purchase more units of other currency, as before appreciation. For instance, the exchange rate is 70 Rs. (INR) per dollar at current date, and after some days, the exchange rate is 77 Rs. (INR) per dollar. Thus it can be said that the dollar has appreciated 10% in relation to Indian rupees.
 
Currency depreciation occurs when the value of a currency reduces in relation to other currencies. Due to depreciation, a currency can now buy less units of other currency as before depreciation. For example, the exchange rate is 70 rs.(INR) at the current date and it depreciates by 10%. Thus after depreciation, the exchange rate will be only (70-10% of 70) 63 Rs.(INR) per dollar.

Verified Answer

Increase in the value of home currency with respect to foreign currency is currency appreciation. Whereas the decrease in value of home currency in relation to foreign currency is termed as currency depreciation.

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