Appreciation and Depreciation of the Nation’s Currency
Currency appreciation is an economic and financial measure of an increase in the worth of a countries’ monetary unit in relation to a standard and universally accepted monetary unit in the world economy. The global currency of choice is the United States of American dollar. Currency depreciation is the opposite of appreciation which is a drop in value of a currency in relation to the US dollar (Arnold, 2010).
This phenomenon in terms of trade between two or more countries would mean that both parties use a standard means of measuring their individual currency worth in terms of the other party’s currency value. Alternatively, they can convert to a standard currency measure to ascertain the exact value that balances in their respective countries for the same products being exchanged, so as not to lose in value due to the trade (Melvin, 2000). In simpler terms, appreciation can be termed as the increase in unit value of one country’s currency that enables it to buy extra unit values of another countries currency. Depreciation is the exact reverse.
In the foreign exchange market, if country’s A currency appreciates it implies that the other trade partner, country B will have to spend more to buy the same product from A. It creates an economic situation known as inflation from country B’s perspective which is defined as a general upwards shift in prices of commodities and services in a certain economy (2010). This will also mean that country B will export more products to A than previously done at a certain amount. If country A’s currency depreciates, then for the same amount of money used to purchase product from country B, will yield less goods and likewise to get a specific level of income from the Country B, country A will have to supply more goods. This scenario of depreciation leads to an economical situation called deflation.