A currency appreciates. What happens to the price of the country's exports to foreign buyers?

They become more expensive. Foreigners must pay more of their own currency for each unit of the stronger currency.

A country's currency depreciates. What is the likely effect on its imports?

They become dearer, so fewer are bought. Each unit of foreign currency now costs more of the home currency.

Which is a likely benefit of a depreciation?

more export sales. Exports become cheaper for buyers abroad.

Why might an appreciation help to reduce inflation?

Imported goods and raw materials become cheaper. Lower import prices feed through to lower prices in the shops and lower costs for firms.

The rate changes from 1 euro = 10 units of a currency to 1 euro = 8 units. That currency has

appreciated against the euro. Fewer units are now needed to buy one euro, so each unit is worth more.

When a currency rises or falls · Edexcel IGCSE Economics

In plain words

When a currency gains value against others, it buys more abroad: imports and foreign holidays get cheaper. But the country's exports get dearer for foreigners, who then buy fewer.

A fall in the currency does the reverse. Either way, some people gain and some lose.

4 things to know

Appreciation is a rise in the value of a floating currency. Depreciation is a fall.
When a government raises a fixed exchange rate on purpose, it is a revaluation. When it lowers one, it is a devaluation.
Appreciation: exports become dearer abroad and imports become cheaper at home. Export sales fall and import spending rises, so the current account tends to get worse. Cheaper imports help to keep inflation down.
Depreciation: exports become cheaper abroad and imports become dearer at home. Export sales rise and imports fall, so the current account tends to improve. Dearer imports can push inflation up.

Worked example

The exchange rate changes from $1 = 80 rupees to $1 = 90 rupees. What happens to the price in rupees of an American good that costs $50?

Before: 50 × 80 = 4000 rupees.
After: 50 × 90 = 4500 rupees.
The dollar has appreciated against the rupee, so American goods are dearer for Indian buyers, by 500 rupees.

Tips and tricks

A memory aid for a strong currency: imports cheap, exports dear. A weak currency is the opposite.
Work out which currency has risen before anything else. If one dollar buys more rupees than before, the dollar has appreciated and the rupee has depreciated.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

When a currency rises or falls: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

A currency appreciates. What happens to the price of the country's exports to foreign buyers?
- They become more expensive. (the answer)
- They become cheaper.
- They do not change.
- They become free.
Foreigners must pay more of their own currency for each unit of the stronger currency.
A country's currency depreciates. What is the likely effect on its imports?
- They become cheaper, so more are bought.
- They become dearer, so fewer are bought. (the answer)
- They are banned.
- There is no effect.
Each unit of foreign currency now costs more of the home currency.
Which is a likely benefit of a depreciation?
- cheaper imports
- lower inflation
- more export sales (the answer)
- cheaper foreign holidays
Exports become cheaper for buyers abroad.
Why might an appreciation help to reduce inflation?
- Exports become cheaper.
- Imported goods and raw materials become cheaper. (the answer)
- Wages rise.
- Interest rates fall.
Lower import prices feed through to lower prices in the shops and lower costs for firms.
The rate changes from 1 euro = 10 units of a currency to 1 euro = 8 units. That currency has
- appreciated against the euro (the answer)
- depreciated against the euro
- not changed
- been devalued to zero
Fewer units are now needed to buy one euro, so each unit is worth more.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 8 marks. Write your answers on paper, then check them.

When a currency rises or falls

Edexcel International GCSE Economics 4EC1 · 8 marks · papermunch.org

Name ______________________________ Date ______________

Explain what is meant by the depreciation of a currency.[2]
Show answerHide answer
A fall in the value of a currency against other currencies in a floating exchange rate system.
I got this one
Explain how a depreciation of a country's currency affects its exporters.[3]
Show answerHide answer
Its exports become cheaper for foreign buyers, so demand for them rises. Exporters sell more, and their revenue and profits are likely to rise.
I got this one
The exchange rate moves from £1 = $1.20 to £1 = $1.50. Calculate the change in the dollar price of a British good that costs £200, and state what has happened to the pound.[3]
Show answerHide answer
It rises from $240 to $300, an increase of $60. The pound has appreciated against the dollar.
I got this one

Answers: When a currency rises or falls

1. A fall in the value of a currency against other currencies in a floating exchange rate system.
2. Its exports become cheaper for foreign buyers, so demand for them rises. Exporters sell more, and their revenue and profits are likely to rise.
3. It rises from $240 to $300, an increase of $60. The pound has appreciated against the dollar.