In AP Macro, depreciation most often means a decrease in the value of a country's currency relative to other currencies in a flexible exchange rate market; it can also mean the wearing out of capital goods, which is why GDP is a "gross" measure that doesn't subtract worn-out capital.
Depreciation shows up in AP Macro with two distinct meanings, and you need both.
Currency depreciation (the big one, Unit 6): a currency depreciates when its value falls relative to another currency in a flexible (floating) exchange rate market. If the dollar goes from buying 100 yen to buying 90 yen, the dollar has depreciated. This happens through ordinary supply and demand for currency. For example, if U.S. real interest rates fall relative to other countries, foreign investors want fewer U.S. assets, demand for dollars falls, and the dollar depreciates (EK MKT-5.G.1). A depreciated currency makes your exports cheaper for foreigners and imports more expensive for you, so net exports rise.
Capital depreciation (Unit 2): physical capital like machines and factories wears out over time. GDP is called gross domestic product because it counts all investment spending without subtracting this worn-out capital. Some gross investment just replaces depreciated capital rather than adding new productive capacity.
Currency depreciation is the payoff step in one of the most-tested chains in the course. Topic 6.6 (LO 6.6.A) asks you to explain how differences in real interest rates across countries affect financial capital flows and foreign exchange markets. The chain runs like this. A country's real interest rate falls, financial capital flows out toward higher-return countries (EK MKT-5.G.1), demand for that country's currency falls, the currency depreciates, and net exports increase. Since central banks influence real interest rates in the short run (EK MKT-5.G.2), depreciation is also how monetary policy spills over into the trade balance. On the Unit 2 side, capital depreciation explains why GDP is a gross measure (LO 2.1.A) and why economists distinguish gross investment from net investment.
Keep studying AP Macroeconomics Unit 6
Real Interest Rate (Units 4 & 6)
The real interest rate is the trigger for currency depreciation. When a country's real interest rate falls relative to other countries, its assets become less attractive, capital flows out, and its currency depreciates. Master this one cause-effect chain and most of Topic 6.6 falls into place.
Expenditure Formula (GDP = C + I + G + Xn) (Unit 2)
Depreciation feeds back into GDP through Xn. A depreciated currency makes exports cheap and imports pricey, so net exports rise and aggregate demand shifts right. That's why a "weak" currency can actually boost output.
Central Banks (Units 4-6)
Central banks set short-run interest rates, which means they indirectly steer the exchange rate. Expansionary monetary policy lowers the real interest rate, which causes capital outflows and currency depreciation (EK MKT-5.G.2). One policy move, two markets affected.
Capital Goods (Units 1-2 & 5)
The second meaning of depreciation is capital goods wearing out. Gross investment includes spending that just replaces depreciated machines, so only net investment (gross investment minus depreciation) actually grows the capital stock and shifts the PPC outward.
Currency depreciation is tested almost entirely as a chain of reasoning. Multiple-choice stems give you a change in one country's real interest rate relative to another and ask what happens next, for example "Country A increases its real interest rate while Country B's stays the same" or "Country X's real interest rate falls below Country Y's, so what happens to Country X's net exports?" You need to trace interest rate to capital flows to currency demand to appreciation or depreciation to net exports, and stop at whichever link the question asks about. On FRQs, expect to draw a correctly labeled foreign exchange market graph showing the currency's demand or supply shifting and to state whether the currency appreciates or depreciates. The 2018 short FRQ on a U.S. recession is a classic setup, since recession-fighting policy lowers interest rates and leads straight into a depreciation question. Always say depreciate or appreciate, not "the currency gets weaker," and always specify relative to which currency.
Depreciation is a market outcome. The currency loses value because demand for it falls or supply of it rises in a flexible exchange rate system. Devaluation is a deliberate government decision to lower the official value of a currency under a fixed exchange rate system. AP Macro questions almost always involve floating rates, so the answer they want is depreciation. If you write "devalue" when the market caused the change, you're using the wrong mechanism.
In AP Macro, depreciation usually means a currency losing value relative to another currency in a flexible exchange rate market.
The core exam chain is: lower relative real interest rate, capital flows out, demand for the currency falls, the currency depreciates, and net exports increase.
Depreciation is caused by market forces under floating exchange rates, while devaluation is a government action under fixed exchange rates.
A depreciated currency makes exports cheaper for foreigners and imports more expensive at home, which raises net exports and aggregate demand.
Capital depreciation is the wearing out of capital goods, and it's the reason GDP is a gross measure that includes replacement investment.
Expansionary monetary policy lowers the real interest rate, which tends to cause currency depreciation through net capital outflows.
It's most often a decrease in a currency's value relative to another currency under flexible exchange rates, driven by supply and demand in the foreign exchange market. It can also mean capital goods wearing out, which is the Unit 2 meaning tied to gross vs. net investment.
No, not automatically. A depreciated currency makes exports cheaper for foreign buyers, so net exports rise and aggregate demand increases, which can help during a recession. The downside is that imports become more expensive for domestic consumers.
Depreciation happens through market forces in a floating exchange rate system. Devaluation is a deliberate government move to lower the currency's official value in a fixed exchange rate system. AP exam scenarios almost always use floating rates, so depreciation is the term you want.
Depreciate. A lower real interest rate relative to other countries makes domestic assets less attractive (EK MKT-5.G.1), so financial capital flows out, demand for the currency falls, and the currency depreciates.
GDP counts all investment spending, including the part that just replaces worn-out capital, without subtracting depreciation. Subtracting depreciation from GDP gives you net domestic product, but the AP exam focuses on the gross measure.