The rate at which one currency is exchanged for another currency is called the rate of exchange. So friends, in today’s article we are going to know about Appreciation and Depreciation of Currency (Currency Appreciation and Depreciation). So let’s discuss in details.
Table of Contents
What is currency appreciation?
Currency Appreciation Meaning – Currency appreciation means rise in the external value of a domestic currency in the foreign exchange market.
What is currency depreciation?
Currency depreciation Meaning – On the other hand, currency depreciation means fall in the external value of a domestic currency in the foreign exchange market.
Both currency appreciation and depreciation are automatic process of the free operation of foreign exchange market. It is influenced by the demand and supply forces in the market.
Foreign exchange is determined by the demand for and supply of foreign exchange. Equilibrium rate of exchange is determined at the point where demand for and supply of foreign exchange are equal to each other.
How foreign exchange rate is determined?
In the following figure, we explained how foreign exchange rate is determined in a free market –
In the above figure, on OX axis we measures foreign exchange demand and supply. On OY axis we measure rate of exchange. DD and SS are the demand and supply functions of foreign exchange.
At point E both DD and SS are equal to each other. It means at point E demand for and supply of foreign exchange are equal to each other. Thus, E is the equilibrium point where we get equilibrium rate of exchange OR.
If the supply of foreign currency is more than its demand “R1S1>R1D1“, the exchange supply conditions (D1S1) will cause a fall or depreciation in the exchange value of foreign currency from OR1 to OR. This signifies an appreciation of exchange value of the home currency.
Again, if the demand for foreign currency is more than its supply “R2D2>R2S2“, the exchange demand condition (S2D2) will cause a rise or appreciation in the exchange value of foreign currency from OR2 to OR.
So friends, this was the concept of Appreciation and Depreciation of Currency (Currency Appreciation and Depreciation). Hope you get the full details about it and hope you like this article.
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