Exchange Rates – IB Economics
The exchange rate is the price of one country’s currency in terms of another country’s currency Quoted exchange rates can be either direct or indirect, Direct: home currency per unit of foreign currency 39 Rupees per US Dollars 80 Rupees per Pound Indirect: foreign currency per unit of home currency 0. 0255102 US Dollar per Indian Rupee 0. 91594 pound per Indian Rupee Appreciation of Currency Currency Appreciation means that the given currency has become more valuable with respect to another currency. For example if the rupee appreciates it means that rupee has become more valuable in relation to dollar. In case of appreciation a “downward” movement takes place. For instance if the rupee moves downwards from 42 per dollar to 39 per dollar then rupee is said to appreciate.
Appreciation make Indian goods expensive for foreigners and make foreign goods cheaper Appreciation leads to unfavorable Balance of Payments Depreciation of a currency Currency Depreciation means that the given currency has become less valuable with respect to another currency. A depreciation of the local currency means that it takes more local currency to buy a unit of foreign currency A depreciation of a country’s runners makes its goods cheaper for
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Depreciation leads to favorable BOP Factors a ting exchange rates (totaling exchange rate ) Exchange rate of a country appreciates if the demand of that country’s currency increases or if there is a shortage in supply Exchange rate of a country depreciates if the demand of that country’s currency decreases or if there is an increase in supply 1. A change in income If a country’s national income increases then its demand for imports will increase and supply of its currency increase ERE depreciates when supply increases
If foreign income rises(US GAP rises), demand for Indian’s export will increase, I. E. Demand for Indian rupees will increase , rupee will appreciate 2. A Change in Relative Prices. Inflation in a country will affect the ERE As the domestic price rises imports will become cheaper and exports will be expensive Supply of currency will increase and demand for currency will fall down If there is inflation in India , its cheaper for India to import and supply of rupee increases, rupee depreciates 3. Interest Rates.
If interest rates rise in one country, then saving becomes highly attractive and emend for currency increases and appreciates If interest rates in US decreases as compared to India then savings in US become less attractive Demand for Indian rupees will increase, as a result rupee appreciates and dollar depreciates 4. Investment Prospects If investors find a country attractive for investment , demand for that country’s currency will increase and ERE will appreciate If investment prospect become better in India compared to US, the demand for US Dollars will fall and dollar depreciates. . Speculation Speculation or speculators in currency can affect the Ere If the speculators feels rupee is overvalued and is due to fall. People holding India Rupees will rush to sell, and supply of Rupee will increase Who n is Better, A Strong or Weak Indian Rupee? When the Indian Rupee is strong or increases in value against all other currencies, the following situations will most likely occur.