Currency appreciation and depreciation

From Wikipedia, the free encyclopedia
  (Redirected from Depreciation (currency))
Jump to navigation Jump to search
William Huskisson, Question concerning the depreciation of our currency, 1810

Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system in which no official currency value is maintained.[1] Currency appreciation in the same context is an increase in the value of the currency. Short-term changes in the value of a currency is reflected in changes in the exchange rate. Following Theory is only that shows relationship between Revenue Project and Currency Appreciation of Country.

Nasir's Revenue Theory (chida,Narowal,Pak.) "Each Economically feasible Revenue Project will appreciate the currency of Country." This is known as NRT.

Currency Appreciation= (NP/SD)(L-PP)100 Where N stands for number of Revenue Projects, P for Production of projects, S for Supply of money for Projects, L for Life of Projects, PP for Payback period of project, Circulation of currency in the market remains constant except for required demand of market in Country. This formula helps: Budget Management for Government, Capital Budgeting for Public and Private limited companies, Strategic Management, Efficiency of State Government and Economical Analysis.

Causes[edit]

In a floating exchange rate system, a currency's value goes up (or down) if the demand for it goes up more (or less) than the supply does. In the short run this can happen unpredictably for a variety of reasons, including the balance of trade, speculation, or other factors in the international capital market. For example, a surge in purchases of foreign goods by home country residents will cause a surge in demand for foreign currency with which to pay for those goods, causing a depreciation of the home currency.

Another cause of appreciation or depreciation of a currency is speculative movements of funds in the belief that a currency is over or under valued, as the case may be, and in anticipation of a “correction”. Such movements may in themselves cause the value of a currency to change.

A longer-run trend of appreciation (or depreciation) is likely to be caused by home country inflation being lower (or higher) on average than inflation in other countries, according to the principle of long-run purchasing power parity.

Economic effects[edit]

When a country's currency appreciates in relation to foreign currencies, foreign goods become cheaper in the domestic market and there is overall downward pressure on domestic prices. In contrast, the prices of domestic goods paid by foreigners go up, which tends to decrease foreign demand for domestic products. A depreciation of the home currency has the opposite effects.

In addition, depreciation of a currency tends to beneficially affect a country’s balance of trade by improving the competitiveness of domestic goods in foreign markets while making foreign goods less competitive in the domestic market by becoming more expensive.

In the international capital market, a change in a currency’s value may give raise to a foreign exchange gain or loss. The appreciation of the domestic currency raises the value of financial instruments denominated in that currency, while there is an adverse impact on debt instruments.

See also[edit]

References[edit]

  1. ^ "The Impact of falling exchange rate | Economics Help". www.economicshelp.org. Retrieved 2016-07-11.