Appreciation and Depreciation

key terms

: An increase in the exchange rate.

• • The home currency becomes relatively more expensive for foreigners to buy. Appreciation also means that foreign currency becomes relatively cheaper for you to buy.
  • If prices in both countries remain the same, an appreciation will make foreign goods relatively cheaper to you, leading to an increase in imports. It also means that, even if prices remain the same, your goods will be more expensive to foreigners. They will buy less of your goods and exports will fall. As a result, your country's net exports will fall.
  • This change to net exports causes a leftward shift of the aggregate demand curve.
  • Example
  • Example: The exchange rate for the dollar with the euro on June 12, 2008 was e = 0.645 €/$. If the exchange rate today were e = 0.9 €/$ the dollar has appreciated.
  • Let's say I was interested in importing Belgian chocolates that cost 1 € each.
  • If I took $100 to the exchanger on June 12th I would have gotten 65 € and could have bought 65 chocolates.
  • If I took $100 to the exchanger today I would have gotten 90 € and could have bought 90 chocolates!
• depreciation: A decrease in the exchange rate.
  
  • The home currency becomes relatively cheaper for foreigners to buy. Depreciation also means that foreign currency becomes relatively more expensive for you to buy.
    • If prices in both countries remain the same, depreciation will make foreign goods relatively more expensive to you, leading to a fall in imports. It also means that, even if prices remain the same, your goods will be cheaper to foreigners. They will buy more of your goods and exports will rise. As a result, your country's net exports will increase.
    • This change to net exports causes a rightward shift of the aggregate demand curve curve.
• Example:  The exchange rate for the dollar with the Euro on June 12, 2008 was e = 0.645 €/$.  If the exchange rate today were e = 0.5 €/$ the dollar has depreciated.

• Let’s say I was interested in importing Belgian chocolates that cost 1 € each
• If I took $100 to the exchanger on June 12th I would have gotten 65 € and could have bought 65 chocolates.
• If I took $100 to the exchanger today I would have gotten 50 € and could have bought 50 chocolates!
• The price of Belgian chocolates did not change, but because the dollar depreciated they become more expensive to you – so you import less.

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