1 page/≈275 words
Literature & Language
Appreciation and Depreciation (Essay Sample)
ESSAY (200-300 words): Explain the difference between appreciation and depreciation of a nation's currency. How do these changes affect the foreign exchange market? ** if possible use source from ECON Macro by Willaim A. McEachern (available online via cengage learning) source..
Appreciation and Depreciation
Capital flow is one of the key factors that affect a nation economy and proper flow of capital is required for a country to have flexible exchange rates. Appreciation of a currency is increase in value of a currency in exchange or in terms, or relative to another currency while depreciation is decrease or loss of assessment of a currency in relation to another in the money markets.
Appreciation occurs due to increased demand of goods and services. This may arise from increased export prices and thus the users of these exports requires the currency to pay for the exports; increased interests rates by the chief bank raises the desire of people to deposit more money into banks accounts to earn interests and increased employment and per capita income increases the need for goods and services thus raising the demand of cash (increased inflation).
Appreciation of a nation`s currency adds an advantage to the country since their currency becomes more valuable and thus can purchase more foreign currencies. This enables the nation to have a higher purchasing power in terms of Imports since imports are less expensive and locally produced exports more expensive thus raising prices of exports relative to prices of imports.
According to William (2009), depreciation of currency is undesirable since its leads to loss of value of a currency. This makes a nation`s currency less valuable compared to other currencies. As a result, imports become more expensive and exports relatively cheap. This denies a country a chance to earn reasonable foreign exchange compared to the import expenses leading to a trade deficit.
Appreciation of currency increases the exchange rate (price of one currency in terms of another or the price of purchasing one currency in terms of another) in the overseas exchange markets. The appreciating currency becomes more expensive.
In conclusion, appreciation and depreciation is both undesirable and call for balance measures which includes devaluation and valuation of the nation currency in order to ensure balan...
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